Tax Multiplier and Foreign Exchange Effects
If the marginal propensity to consume (MPC) is 0.6, the tax multiplier is calculated as -MPC/MPS. What is the tax multiplier, and what is the expected effect of a tax cut on the foreign exchange market?
The tax multiplier is -1.5; a tax cut decreases aggregate demand, causing a leftward shift in the supply curve and a depreciation of the dollar.
The tax multiplier is -1.5; a tax cut increases disposable income, raises aggregate demand and interest rates, shifting the demand for dollars right and leading to appreciation.
The tax multiplier is -2.0; a tax cut increases aggregate demand and shifts the supply curve right, leading to an appreciation of the dollar.
The tax multiplier is -2.0; a tax cut decreases aggregate demand and shifts the demand curve left, resulting in depreciation of the dollar.
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