AP MacroeconomicsAggregate Demand & Supply
Tax Multiplier
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.
Formula / Example
Tax multiplier = −MPC ÷ (1 − MPC) = −MPC ÷ MPS.
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