HOW COME SOME PEOPLE PRESENT THE TAX MULTIPLIER AS -MPC/1-MPC, WHEN OTHER PRESENT IT AS MPC/1-MPC?
I ALWAYS SEE ONE FORMULA WITH A NEGATIVE AND THE OTHER WITHOUT A NEGATIVE MPC ON TOP OF THE FORMULA.SO, WHICH IS THE CORRECT ONE? OR ARE THEY BOTH CORRECT? EXPLAIN.
If you have seen the second one of these that you mention (the one with a positive MPC on top of the fraction), I do not believe it could possibly be correct. The reason for this is that the tax multiplier must always be negative.
Think about it -- if taxes go up, do we get more aggregate demand? No -- we get less. So if taxes go up, the change in AD must be negative.
When we use the tax multiplier, what we are saying is this:
Change in taxes times multiplier = change in AD.
So a positive change in taxes (they go up) has to equal a negative change in AD. Mathematically, that means the multiplier must be negative.
If you have a positive MPC on the top of your fraction, the multiplier will be positive and that can't be.