ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -How is the tax multiplier calculated? The tax multiplier is calculated using a variable called MPC (marginal propensity to consume), which is the percentage of an increase in income that is spent. Tax multiplier is then calculated using the formula:-MPC/(1-MPC).

Detailed explanation-2: -The magnitude of the multiplier is directly related to the marginal propensity to consume (MPC), which is defined as the proportion of an increase in income that gets spent on consumption. For example, if consumers save 20% of new income and spend the rest, then their MPC would be 0.8 (1-0.2).

Detailed explanation-3: -The tax multiplier measures how gross domestic product (GDP) is impacted by changes in taxation. GDP is defined as the total value of goods and services produced in a country over a given time frame. The tax multiplier is negative in value because as taxes decrease, demand for goods and services increases.

Detailed explanation-4: -Assuming no proportional taxes but including imports, the output multiplier formula is 1 / (1-MPC + MPI). Just like taxes, the propensity to import tends to lower the multiplier effect because demand for domestically produced final goods and services falls.

Detailed explanation-5: -The multiplier effect is the magnified increase in equilibrium GDP that occurs when any component of aggregate expenditures changes. The greater the MPC (the smaller the MPS), the greater the multiplier.