Question

A $500 increase in government spending contains more fiscal stimulus than a $500 tax cut.

True or false

Answer 1

The government spending multiplier = 1/(1-MPC), where MPC = marginal propensity to consume

0 < MPC < 1

The tax multiplier = -MPC/(1-MPC)

The absolute value of the tax multiplier = MPC/(1-MPC)

1/(1-MPC) > MPC/(1-MPC)

Thus, the absolute value of the government spending multiplier is greater than the tax multiplier.

This implies that for the government spending of $500, the fiscal stimulus is more than a $500 tax-cut as the absolute value of the government spending multiplier is greater than the tax multiplier.

Thus, the correct answer is TRUE