ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The formula for the output multiplier when proportional taxes are present is: 1 / (1-MPC (1-t)). Proportional taxes reduce the size of the multiplier because they lower disposable income in each round of the multiplier.

Detailed explanation-2: -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-3: -The Tax Multiplier Let us consider the effect of a one-dollar cut in the level of taxes: for any given income, the level of taxes falls by one dollar, but the marginal tax rate stays constant. The tax cut causes a multiplier process that raises national income and product.

Detailed explanation-4: -The Keynesian Multiplier is an economic theory that asserts that an increase in private consumption expenditure, investment expenditure, or net government spending (gross government spending – government tax revenue) raises the total Gross Domestic Product (GDP) by more than the amount of the increase.

Detailed explanation-5: -Tax Multiplier = – 0.44 / (1 – 0.44) Tax Multiplier = – 0.80.