Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.
A)the same as
B)less than
C)bigger than
D)not relevant to

Question

Quizplus · Accepted Answer

The multiplier effect for taxes is less than that for changes in autonomous aggregate spending because taxes have a negative impact on aggregate demand. When taxes are increased, people have less disposable income to spend, which leads to a decrease in consumption and investment. This, in turn, leads to a decrease in aggregate demand and a decrease in GDP. The multiplier effect for changes in autonomous aggregate spending, on the other hand, is larger because increases in autonomous spending lead to a larger increase in aggregate demand, which leads to a larger increase in GDP.

Holding Everything Else Constant, the Multiplier Effect for Taxes Is