TutorOn by Sanath Withanage

Question:

Which of the following is the correct relationship between multipliers?
(1) Investment multiplier > Tax multiplier = Balanced budget multiplier.
(2) Tax multiplier = Investment multiplier < Balanced budget multiplier. (3) Tax multiplier > Investment multiplier > Balanced budget multiplier.
(4) Tax multiplier > Investment multiplier < Balanced budget multiplier. (5) Investment multiplier > Tax multiplier > Balanced budget multiplier.

Correct Answer:

(5)

Answer Explanation:

The Investment (Expenditure) Multiplier is $1/(1-MPC)$. The Tax Multiplier is $MPC/(1-MPC)$. Since MPC is a fraction between 0 and 1, the Investment Multiplier is always larger. The Balanced Budget Multiplier is exactly 1. Therefore: Investment > Tax > Balanced Budget.

Topic: Macroeconomics Year: 2021