Taxes on level of income

The effect of a decline in taxes on the level of income will differ somewhat from an increase in government expenditures of the same amount because:
a. tax declines tend to be more expansionary
b. households may not spend all of an increase in disposable income
c. the MPC which applies to the incomes of households always exceeds the MPC which applies to business incomes
d. the multiplier is high when the MPS is low

I assume that the MPC means Margnal propensity to Consume. I am not sure what you mean by "level of income". Answer #c. makes sense to me, if it is an income tax reduction to individuals. Answer #a also makes sense, but is not an explanation.

Money given directly to individuals as a tax reduction is more likely to be spent than government expenditure to industry.


I think the answer is b.

Total income for an economy is measured by GNP (or GDP); and GNP=C+I+G.
When government raises spending by x, GNP immediately goes up by x. However, a multipler kicks in, where the multiplier is 1/MPS. So, total spending increased spending becomes m*x, where m is the multiplier.

Now then, when taxes decrease by x dollars, disposable income goes up by x. However, households do not spend the full amount, the spend some and save some according to thier MPS. Total income goes up by x*MPC. Then the multiplier kicks in. In the end, Macroeconomics teaches that the taxation multiplier is (1/MPS)-1.

So, a is not true, tax declines tend to be less expansionary (than government spending)

c is not true, the possible differences in MPC between households and business is irrelevant.

while the statement in d is true, it does not explain the question. The multiplier of gvt is 1/MPS, for tax it is (1/MPS) -1

Now then, AMY, when you expand past 1st term macro, the world becomes more complicated. My simplistic explanation will not suffice. But do not worry about this now.

  1. 👍
  2. 👎
  3. 👁

Respond to this Question

First Name

Your Response

Similar Questions

  1. Social Studies 8

    1. for the additional green spaces to be considered public services, what must be true? A. The local government uses tax money to create them B. a national business provides funding for some of the spaces C. people who purchased

  2. Math

    Calculate S(17) for the geometric series 256 - 128 + 64 - 32 + ... using the finite geometric sum formula. Round your answer to three decimal places. 170.668 0.004 511.996 168,151.254 Find a(5) for the geometric sequence in which

  3. U.S. History

    Which one of these was not the causes of the Great Depression? excessive income taxes speculative stock purchases risky banking practices severe drought I think it is excessive income taxes or severe drought. But I don't think it

  4. Social Studies Help PLEASE CHECK!!

    The citizens of a small city have been eager to see more green space in their environment. There are several abandoned lots that activists think could be turned into community gardens or parks for people to freely enjoy. Use the

  1. Economics

    If the MPC is .8 and the government increases both spending and lump-sum taxes by $100 million, then we would expect: a) an increase in total income of $500 million b) a reduction in equilibrium income of $80 million c)an increase

  2. college accounting

    For its fiscal year ending October 31, 2010, Molini Corporation reports the following partial data. Income before income taxes $540,000 Income tax expense (30% $390,000) 117,000 Income before extraordinary items 423,000

  3. Math

    A certain country taxes the first $20,000 of an individual's income at a rate of 15%, and all income over $20,000 is taxed at 20%. a. Al makes $16,000. Betty makes $36,000. How much is each taxed? b. Write a piecewise function T

  4. econ

    If the average level of nominal income in a nation is $21,000 and the price level index is 154, the average real income is about:- a)$12,546 b)$13,636 c)$15,299 d)$17,823

  1. Social studies-Unit 6 :building on Economics Basic

    2. What is one source of revenue for the federal government to pay for public goods and services? A - property taxes B- sales taxes C- income taxes D- excise taxes I think it's c ! 3. What is one the things the federal reserve

  2. microeconomics

    how do i figure this out? if all incomes were equalized by government taxes and transfer payments, how much would the average household in each income quintile gaine (via transfers) or lose (via taxes)? Hummm, for real or as a

  3. Economics

    The assessed value of Patty's residential property was $200,000 in 2004. In 2006, the assessed value increased to $225,000. The property tax rate in both years was 1.2 percent. Patty earned $60,000 each year. Determine Patty’s

  4. algebra

    In a certain state, people with an income under $15K pay a minimum income tax plus a % of the amount over $12,750.00. The table below shows the income, x, and the taxes paid; y for several people. Using a a linear model, what is

You can view more similar questions or ask a new question.