Question

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? Explain.

the minimum required change in taxes will be greater than 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

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 required change in government spending.