The figure above shows two aggregate expenditure lines.
-In the figure above, what would happen to the size of the multiplier if marginal income tax rates were increased?
A) The multiplier would fall in value and might become negative.
B) The multiplier would fall in value but would not become negative.
C) The multiplier would rise in value.
D) The multiplier would not change in value.
E) More information is needed to determine the effect on the size of the multiplier.

Question

The figure above shows two aggregate expenditure lines.
-In the figure above, what would happen to the size of the multiplier if marginal income tax rates were increased?
A) The multiplier would fall in value and might become negative. 
B) The multiplier would fall in value but would not become negative. 
C) The multiplier would rise in value. 
D) The multiplier would not change in value. 
E) More information is needed to determine the effect on the size of the multiplier.

Quizplus · Accepted Answer

Increasing marginal income tax rates reduces the disposable income available for consumers to spend, leading to a decrease in the marginal propensity to consume. This, in turn, reduces the size of the multiplier effect in the economy, as each dollar of investment leads to a smaller increase in total income. However, the multiplier would not become negative; it would simply have a reduced positive value.

The Figure Above Shows Two Aggregate Expenditure Lines