Question

What is and How do you find the Government-Purchases Multiplier? What is and How do You find the Balanced-Budget Government-Purchases Multiplier? What is and how do you find the Tax Multiplier?

Explain why G and T have different multipliers.

Answer 1

Government Purchase Multiplier:

= (1/1-MPC) *Government expenditure of purchase.

Balanced Budget Multiplier =

= -MPC/1-MPC + 1/1-MPC

= 1-MPC/1-MPC

= 1

Tax multiplier:

= (-MPC/1-MPC)*Fall in Tax.

Tax multiplier is less than government purchase or expenditure multiplier. It is one point less than government expenditure multiplier. Initial round is missing in tax multiplier while there is no such case with purchase multiplier. in initial round, income rises equal to expenditure amount.