Question

Suppose the tax multiplier is 2.7. Assuming prices are constant, this means that

Group of answer choices

a $1 rise in government spending will raise both total spending and Real GDP (assuming prices are constant) by $2.70.

a $1 decline in taxes will lower Real GDP by $2.70.

a $1 decline in taxes will raise Real GDP by $2.70.

a $1 rise in taxes will change interest rates by 2.70 percent compared to what they were before the $1 rise in government spending.

none of these options.

Answer 1

a $1 rise in government spending will raise both total spending and Real GDP (assuming prices are constant) by $2.70.

Step-by-step explanation:

The tax multiplier is generally used to show the multiple at which there is either a decrease or an increase in gross domestic product when there is either an increase or decrease in tax. Therefore, if the tax multiplier is equivalent to '$n' and assuming there is no change in price, there will be an increase of '$n' on the GDP and total spending for every dollar increase in the spending of government.