Let taxes be fixed and equal to T, consumption given by
C = a + bY - T), investment and government spending exogenous, and net exports described by X = g - mY. The multiplier for T would then be
A) 1/[1 - 1 - t)b + m].
B) b/[1 - 1 - t)b + m].
C) b/1 - b + m).
D) -1/[1 - 1 - t)b + m].
E) -b/1 - b + m).

Question

Quizplus · Accepted Answer

The correct formula for the multiplier when taxes are increased is -b/(1 - b + m), where b is the marginal propensity to consume and m is the marginal propensity to import. This formula accounts for the decrease in consumption due to an increase in taxes, adjusted for the propensities to consume and import.

Let Taxes Be Fixed and Equal to T, Consumption Given