APFIVE Spending and Tax Multiplier Properties
All of the following statements regarding the spending multiplier and tax multiplier are true except:
A
The tax multiplier is calculated as -MPC/MPS, reflecting that an increase in taxes reduces disposable income and thus consumption.
B
The tax multiplier is always larger in absolute value than the spending multiplier because each dollar of a tax cut fully converts into spending.
C
An increase in government spending has a larger effect on GDP than an equivalent tax cut because the tax multiplier is smaller in magnitude.
D
The spending multiplier is calculated as 1/MPS; for example, if MPS is 0.2, the multiplier is 5.
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