Question

Suppose that a $4 billion increase in government spending increases Real GDP by $60 billion, and that a $3 billion tax reduction increases Real GDP by $68 billion. In this situation, the tax multiplier is _______________ the government spending multiplier.

Answer 1

The tax multiplier is bigger than the spending multiplier. This means that an increase or decrease in taxes has a bigger impact on the economy.

Step-by-step explanation:

To calculate the effect of an increase in public spending and an increase in taxes, we need to calculate the respective multipliers.

Tax multiplier represents the multiple by which gross domestic product (GDP) increases (decreases) in response to a decrease (increase) in taxes.

Decrease in taxes= change in GDP/tax multiplier

tax multiplier= change in GDP/Decrease in taxes

tax multiplier= 68billion/3billion=22,67

Spending multiplier represents the multiple by which GDP increases or decreases in response to an increase and decrease in government expenditures and investment.

Increase in government expenditures= change in GDP/spending multiplier

Spending multiplier=change in GDP/Increase in government expenditures

Spending multiplier=60billion/4billion=15

The tax multiplier is bigger than the spending multiplier. This means that an increase or decrease in taxes has a bigger impact on the economy.