Answer to Question #251078 in Financial Math for Millicent

Question

Which of the following statements are correct?

1. The introduction of government spending increases the size of the multiplier.
2. The introduction of taxes increases the size of the multiplier.
3. The introduction of taxes reduces the slope of the consumption function.

Select one:

A. None of the statements is correct.

B. A

C. B

D. C

Answer 1

An increase in income tax leads to less spending and therefore it reduces the size of the multiplier.

A reduction in taxes will increase disposable income. From the consumption function, this results in an increase in consumption.

The introduction of government spending will not change the size of the multiplier.

So, the correct answer is A because none of the statements is correct.