Tax Multiplier
Definition
The tax multiplier represents the change in aggregate demand resulting from a change in government taxes. It measures how much total spending changes for each dollar change in taxes.
Analogy
Think of the tax multiplier as a magnifying glass for changes in government taxes. Just like a magnifying glass makes objects appear bigger, the tax multiplier amplifies the impact of changes in taxes on overall spending.
Related terms
Fiscal Policy: Government actions related to taxation and spending aimed at influencing economic conditions.
Automatic Stabilizers: Features built into the economy, such as progressive taxation and unemployment benefits, that automatically stabilize fluctuations in economic activity without requiring explicit policy action.
Discretionary Fiscal Policy: Deliberate changes made by policymakers to government spending or taxation with the goal of stabilizing or stimulating the economy.
"Tax Multiplier" appears in:
Study guides (2)
Practice Questions (7)
Which of the following is a characteristic of the tax multiplier?
Which of the following represents the relationship between the size of the tax multiplier and the marginal propensity to consume (MPC)?
Which of the following best represents the formula for calculating the tax multiplier?
Which of the following scenarios would result in a larger value for the tax multiplier?
Which of the following accurately describes the relationship between the tax rate and the size of the tax multiplier?
What does the tax multiplier measure?
Which formula is used to calculate the tax multiplier?
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