Question

Scenario: Fiscal Policy Consider the economy of Arcadia. Its households spend 75% of increases in their income. There are no taxes and no foreign trade. Its currency is the arc. Potential output is 600 billion arcs. Reference: Ref 13-11 (Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. Suppose the government decides to tax its citizens. The tax multiplier is: Group of answer choices impossible to determine. zero, because changes in taxes have no effect on aggregate demand. greater than the government spending multiplier. less than the government spending multiplier.

Answer 1

Answer:

less than the government spending multiplier

Explanation:

Given :

Percentage spends  by a households for the increase in the income = 75%

So the mpc = 0.75

Potential output = 600 billion arcs

The government multiplier is = $\frac{1}{1-0.75}$

                                                $=\frac{1}{0.25}$

                                                = 4

The tax multiplier is = $\frac{c}{1-c}$

                                 $=\frac{0.75}{0.25}$

                                 = 3

Thus we see that the tax multiplier is less than the government spending multiplier.