ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Trading Multiplier = 1-Spending multiplier. Thus, it means that the government spending multiplier is more than the tax multiplier. It further denotes that the increase in the GDP due to a rise in government spending multiplier by $100 billion will be greater than a rise in the GDP due to a fall in tax by $100 billion.

Detailed explanation-2: -Increasing taxes by $100 Billions is a contractionary fiscal policy. Increase in taxes reduces the disposable income and thus decrease aggregate demand. Aggregate demand will decrease more than $100 Billions because of tax multiplier effect.

Detailed explanation-3: -An initial increase in government spending of $100 billion can create more than $100 billion through what economists call: a multiplier effect. Expansionary fiscal policy occurs when: the government increases spending or decreases taxes to stimulate the economy toward expansion.

Detailed explanation-4: -The balanced-budget multiplier is equal to 1 and can be summarized as follows: when the government increases spending and taxes by the same amount, output will go up by that same amount.