The change in GDP that results from an increase in taxation is known as the tax multiplier. When the government raises taxes and MPC is [tex]0.8[/tex], the tax multiplier also rises, which causes the aggregate demand to move to the left. However, this choice is flawed because the tax multiplier is $[tex]400[/tex]billion.
Tax multiplier: MPC1 MPC=[tex]0.80 MPC=0.80 MPC=100 = $400 billion[/tex]
The selection is in error. The increase in taxes would reduce consumers' disposable income and cause a decline in spending. As a result, aggregate demand will decrease and move $[tex]400[/tex]billion to the left. The assertion is untrue. The aggregate demand would decline initially as a result of a tax rise and later on due to a change in disposable income. Although.
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