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Part A: True/False/Uncertain Questions Indicate whether each of the following statements is true, false or uncertain and expl
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Answer #1

1.

False

Increase in the tax rate, will have the lower effect than that of the decrease in government spending and it is due to the difference in the size of multipliers. Increase in tax rate makes impact with taxation multiplier and decrease in government spending makes impact with spending multiplier. Here, spending multiplier is bigger than the taxation multiplier.

Taxation multiplier has relatively lower size, because of the marginal propensity to consume (MPC) affecting the consumption behavior.

Taxation Multiplier = - MPC*(1/(1-MPC))

Or

Taxation Multiplier = - MPC*spending multiplier

Above equation shows that taxation multiplier is the discounted value of spending multiplier by MPC.

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