If the government changes taxes without changing government spending to eliminate the recessionary gap, will the minimum required change in taxes be greater than, smaller than, or equal to the minimum required change in government spending?

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Cali

21 August, 07:06

If the government changes taxes without changing government spending to eliminate the recessionary gap, will the minimum required change in taxes be greater than, smaller than, or equal to the minimum required change in government spending?

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Macy Hodge · Answer 1

If the government changes taxes without changing government spending to eliminate the recessionary gap, will the minimum required change in taxes be greater than, smaller than, or equal to the minimum required change in government spending?

The minimum required change in taxes will be greater than that of the minimum required change in government spending

tax multiplier (mpc/mps = 0/8/0.2=0.4) is smaller than the government spending multiplier (1/mps = 1/.2=5) because of the initial increase in disposable income caused by the decrease in income tax will be saved rather than spent