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


what is the role of advertising in baumol''s model?

Buckley (2009) writes that the UK was in recession for several short periods during this time, which placed further emphasis on researchingrelationships between the price of oil an

Minimum wage laws are common in many countries. The debate over minimum wage includes claims about the impact of this action on employment levels and wage levels. What impact does

Discuss how decisions are made in your workgroup. Which model is used for what situation? Be sure to provide specific examples of at least three situations and what model was used

The project has been split into four main chapters; literature review, data and methodology, results and a conclusion. The appendix contains the estimated tables and graphs, of whi

a.  State concisely, in your own words, the essence i.of what GDP measures and ii.what GDP doesnot measure.  b.  Stocks and bonds issued by firms comprise the "Investment" co

what are the implications of corruption in economy and fiscal policy

Q. Describe about Price level and time? We are hardly interested in the value of price level at a certain point in time. What we are interested in is percentage change in the p