Spending Multiplier vs Tax Multiplier
Spending Multiplier and Tax Multiplier are two Aggregate Demand & Supply concepts in AP Economics that students often mix up. In short: spending multiplier is the spending multiplier measures how much real GDP changes for each dollar change in autonomous spending. Meanwhile, tax multiplier is the tax multiplier measures the change in real GDP from a change in taxes; it is negative and smaller in size than the spending multiplier. Here is how they compare side by side.
The spending multiplier measures how much real GDP changes for each dollar change in autonomous spending.
A higher marginal propensity to consume produces a larger multiplier because more of each dollar is re-spent. It is used to estimate the GDP impact of fiscal policy. It assumes spare capacity and ignores crowding out.
The tax multiplier measures the change in real GDP from a change in taxes; it is negative and smaller in size than the spending multiplier.
A tax cut raises disposable income, but households save part of it, so only the consumed share is spent in the first round. That makes its initial effect smaller than direct government spending. It is negative because higher taxes reduce GDP.
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