Explain the difference between the government purchases multiplier and the net tax multiplier. If the MPC falls, what happens to the tax multiplier?
Take a shot. What do you think is the difference. Hint: if government spending goes up by $100, then incomes immediately rise by $100. Then people spend some portion of this, and save the rest -- generating a multiplier effect. In the tax world, if taxes fall by $100, how much do people spend of this increase in disposable income?
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