If the government increases taxes to address the budget deficit, then according to the multiplier effect...
If the government increases taxes to address the budget deficit, then according to the multiplier effect
A.AD will increase by more than the change in taxes
B.AD will increase by less than the change in taxes
C.AD will decrease by more than the change in taxes
D.AD will decrease by less than the change in taxes
Homework Answers
Answer
Option C
C.AD will decrease by more than the change in taxes
The increase in the taxes decreases the AD more than the tax value.
change in the AD=change in taxes * tax multiplier
the multiplier is negative and more than 1 so the increase in the tax decreases AD more than the initial change in the tax.
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