During normal times, the multiplier effect of an increase in government spending financed by taxes will be
A) strengthened, if the additional spending flows into sectors of the economy where the unemployment rates are low.
B) weakened by an offsetting reduction in spending due to the higher taxes.
C) unaffected, as long as the higher taxes are in the future.
D) strengthened, if corporate tax rates are increased and personal tax rates remain unchanged.

Question

Quizplus · Accepted Answer

An increase in government spending financed by taxes will lead to higher taxes, which will reduce disposable income and consumption spending. This reduction in spending will offset the initial increase in government spending, weakening the multiplier effect.

During Normal Times, the Multiplier Effect of an Increase in Government