Answer to Question #95250 in Macroeconomics for komal

Question

7. Explain carefully why the tax multiplier [ Y>T =b>(1 - b)] is negative and why it is smaller in absolute value than the government expenditure multiplier [Y>G = 1>(1 - b)].

Answer 1

 Why the Tax Multiplier is Negative

 

The tax multiplier is the magnificent effect of change in taxes on aggregate demand. It is always negative because there is an inverse relationship between taxes and aggregate demand. This means that as taxes decrease aggregate demand increases. The tax multiplier is smaller in absolute value than the government multiplier because some portion of the decrease in taxes will be saved by households and will not be spent. Some portion will be therefore spent on imported goods

Reference

Martin Gibbs; “The tax multiplier effect” https://study.com/academy/lesson/tax-multiplier-effect-defination.formula.html#