In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:
A) not change.
B) be smaller.
C) be bigger.
D) be equal to 1.

Question

Quizplus · Accepted Answer

When taxes are made a function of income (T = T + tY), the marginal propensity to consume out of disposable income decreases because a portion of any additional income is taxed away. This results in a smaller multiplier for government purchases compared to a case where t (the marginal tax rate) is zero, because less of each dollar of government spending translates into consumer spending.

In the Keynesian-Cross Analysis, Assume That the Analysis of Taxes