Answer to Question #261213 in Microeconomics for Katlego

Question

How do taxes affect the level of aggregate autonomous spending, The multiplier and the Equilibrium income in the economy

Answer 1

The multiplier effect of taxes is weaker than the multiplier effect of government spending. This is used when choosing fiscal policy instruments. If it is aimed at overcoming the cyclical downturn, then government spending is usually increased, which gives a strong stimulating effect. Taxes are being increased to curb the inflationary upswing .

The mechanism of the impact of taxes on the volume of social production can be used in order to maintain output as close as possible to its potential level. However, it should be borne in mind that a stimulating fiscal policy will tend to lead to an increase in interest rates and a reduction in investment spending. This weakens or even completely undermines the stimulating effect of fiscal policy, i.e. the mechanism of fiscal policy is quite complicated.

By changing taxes, the state has an impact on the change in aggregate demand and the national product. With the increase in taxes, consumer spending, aggregate demand and output are reduced.

An increase in accord taxes and an increase in the proportional tax rate causes a reduction in aggregate demand.

The income tax rate does not affect autonomous expenses, but changes the multiplier value. An increase in the income tax rate leads to a decrease in the multiplier and, consequently, to a decrease in the equilibrium output.