The government ‘purchases multiplier’ always has a positive sign and the ‘tax multiplier’ always has a...

The government ‘purchases multiplier’ always has a positive sign and the ‘tax multiplier’ always has a negative sign. True or false? Provide explanation.

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Expert Solution

In government Purchases, the Government spends an amount and the whole amount is an expenditure for the economy thus the entire amount multiplies while in case of taxes the Government reduces the taxes and the disposable income of the citizens increases. This increase in income will not be spend entirely as a part of it will be saved. Hence only the part which is spent will multiply. Hence the Purchase multiplier is always more than the tax multiplier.

Government either purchases or decreases tax to increase the aggregate demand of the economy. Now, Purchase multiplier is positive as when government purchases more the aggregated demand will increase more while in case of taxes when government reduces taxes more the aggregate demand increases more. Hence Purchases is positively related to the aggregated demand while the taxes are negatively related to aggregate demand.

Hence the statement is correct

Rahul Sunny answered 1 year ago

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