Given a marginal propensity to consume of 0.9,
the multiplier effect of an increase of $100
billion in government purchases of goods and services is larger than the multiplier effect of a tax cut of $
100
billion because:
the government pays higher prices than households for the same goods and services.
many households fail to file their income taxes and claim their refunds.
the production of goods and services the government purchases has a larger impact on real GDP than the production of consumer goods.
in the first round of spending, only $
90 billion of the tax cut will be spent, and $
10 billion will be saved, while the entire $
100 billion of government purchases will be spent.