Author Question: Why is the tax multiplier smaller than the government spending ... (Read 84 times)

NClaborn · **on:** Jun 30, 2018

Why is the tax multiplier smaller than the government spending multiplier?

Question 2

Which of the following actions of the Fed will increase money supply in the U.S. directly?
a. Purchase U.S. government bonds
b. Increase the federal funds rate
c. Increase the reserve requirement
d. Increase the discount rate
e. Ban sales of private mutual funds

tandmlomax84 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The tax multiplier is smaller than the government spending multiplier because government spending has a direct impact on aggregate demand, while a tax cut has only an indirect impact on aggregate demand. Consumers will save some of their income from the tax cut.

Answer to Question 2

a