Chapter 21, Problem 3MCQ

To determine

The effect of presence of income taxes on the spending multiplier

Answer to Problem 3MCQ

From the available options, the correct option is decrease it.

Explanation of Solution

In the presence of taxes, the spending multiplier will decrease because increase in taxes would cause the real GDP decrease.

Therefore, the correct option is b (decrease it) and all other options are incorrect because there will be no increase, negate or destabilize effect on spending multiplier when taxes are imposed in the economy. As if there is imposition of tax in the country then the spending multiplier will affect the real GDP but if there is no imposition of tax then the spending multiplier would remain positive.

Economics Concept Introduction

Introduction: The spending multiplier represents the impact of change in autonomous spending on total spending and demand in the economy of the country which may increase or decrease.