Understanding Tax Cuts and Multipliers

What is the primary reason that tax cuts have a smaller impact on closing a recessionary gap compared to government spending?

• Tax cuts are not immediate.

• Government spending is more targeted.

• Tax cuts are usually smaller in amount.

• People tend to save a portion of the tax cut.

If the marginal propensity to consume is 0.5, what is the correct multiplier?

• 1

• 10

• 2

• 5

Why does a $20 billion tax cut not fully close the $40 billion recessionary gap when the MPC is 0.5?

• Because the multiplier is too high.

• Because only half of the tax cut is spent.

• Because the tax cut is too small.

• Because the gap is underestimated.

When the marginal propensity to consume is 0.8, what is the calculated multiplier?

• 5

• 2

• 3

• 4

In a scenario where the MPC is 0.8, how much should taxes be cut to close a $40 billion gap?

• $40 billion

• $5 billion

• $10 billion

• $20 billion