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...

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.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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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.

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