|Posted on April 14, 2014 at 7:55 PM|
In the Keynesian model, the tax multiplier is -MPC/MPS. The tax multiplier is less than the spending multiplier because this formula accounts for savings, which is a leakage. Leakages are not directly used for spending in the short run.
If there is an increase in taxes, multiply the negative tax mulitplier by the change in taxes to see the potential change in real GDP. If there is a decrease in taxes, do the same thing as before, but ignore the negative sign to see the potential increase in real GDP.
AP Macroeconomics Unit 3 AD/AS & Fiscal Policy