Tax-adjusted multiplier and the balanced budget multiplier, Macroeconomics

The tax-adjusted Multiplier and the balanced budget Multiplier are explained below:

Taxes act as drag on the multiplier effect of government expenditure, because they represent a leakage from the circular flow of incomes. The tax-adjusted multiplier k* is lesser than the basic Keynesian multiplier, k, introduced earlier. k* is given by {1/[1-(MPC)(1-t)]}, where the t is net income tax rate, and becomes T = tY. The higher is the tax rate, the greater is the leakage and the smaller fiscal policy multiplier.

It is interesting to consider special case of the balance budget multiplier. The concept here is that if government expends Rs.10 bn and finances it by raising the value fo taxes by Rs. 10 bn, the multiplier will not be zero, as one may initially expect. This is since, higher tax causes disposable income to fall, which in turn causes the saving and imports (the remaining two types of leakages) to fall. Hence the net leakage from the system is even less than Rs. 10 and there is the positive multiplier effect, albeit small.

Posted Date: 7/19/2012 3:23:51 AM | Location : United States







Related Discussions:- Tax-adjusted multiplier and the balanced budget multiplier, Assignment Help, Ask Question on Tax-adjusted multiplier and the balanced budget multiplier, Get Answer, Expert's Help, Tax-adjusted multiplier and the balanced budget multiplier Discussions

Write discussion on Tax-adjusted multiplier and the balanced budget multiplier
Your posts are moderated
Related Questions
The consumer's utility function is u(x1,x2) = (x1) (x2)^2 (a) Graph his budget constraint for p1 = 3, p2 = 2 and M = 900, and write down the equation for his budget line. (b)

A local movie theater wants to know how much popcorn they should stock for a given movie showing. Records from 94 movies reveal a mean of 57 boxes and a standard deviation of 17.8.

The aggregate production function Definition Imagine the national economy during a short period of time (say one week). We refer:  L: total amount of work used duri

Identify trends or other patterns in inflation within the Spanish economy over the last five years using quarterly data. You must include data to justify the trends described.

derive equations for IS,LM and AD curves.

1.  You are managing a breakfast and lunch only restaurant that sells all-inclusive plated meals (i.e. all lunches include any protein or hot foods as well as salads and sides on a

Q. What is Investment demand? Investment demand  Investment I(r) is assumed to be negatively related to the real interest rate r Total dema

A government can finance its budget deficit by doing all of the following except: A. borrowing from its central bank. B. printing money. C. selling bonds. D. buying bonds.

1. Consider the following game: a) Does either player have a dominant strategy? b) Does either player have a (pure) prudent strategy? c) Does the game have a saddlepo

Discuss whether high indirect taxes are best way to discourage smoking