A tax increase has
A)a multiplier effect but not a crowding out effect
B)a crowding out effect but not a multiplier effect
C)both a crowding out and multiplier effect
D)neither a multiplier or crowding out effect

Question

Quizplus · Accepted Answer

A tax increase can have a multiplier effect by reducing disposable income and thus decreasing consumption and aggregate demand. It can also have a crowding out effect if the government uses the increased revenue to finance spending, potentially leading to higher interest rates and reduced private investment.

A Tax Increase Has