If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

### Course: AP®︎/College Macroeconomics>Unit 3

Lesson 2: Multipliers

# Tax multiplier, MPC, and MPS

The spending multiplier and tax multiplier will cause a \$1 change in spending or taxes to lead to further changes in AD and aggregate output. The spending multiplier is always 1 greater than the tax multiplier because with taxes some of the initial impact of the tax is saved, which is not true of the spending multiplier.

## Want to join the conversation?

• At , why does the X is equal to negative delta T multiplied by MPC?
• I had the same question. I watched a few videos on the tax multiplier and I believe the reason it's negative is because of the way it affects aggregate demand in an economy. When taxes go down, the aggregate demand curve will increase (people will be consuming more with the extra money not going towards taxes); and vise versa, when taxes go up, the aggregate demand curve will decrease. Like in this example, taxes were introduced, and the effect on the net GDP in the economy will be negative. One can calculate the estimated effect on an economy due to tax increases or decreases using this tax multiplier formula. If you want GDP to go up, decrease taxes and use this formula to find out how much the aggregate demand will be shifted; it will be positive, as there will be another negative sign within delta t due to taxes going down.
I hope this helps clear it up a bit!
• At , how is x = -ΔT.MPC ?
In my opinion shouldn't it be x - ΔT. MPC? because the tax he gave is deducted from the amount he spent. For eg - Earlier if I gave 1000\$ but now I can to pay \$920 as 80\$ is paid in taxes.
I didn't get the reasoning/logic sal gave. Please, help me understand.
• Not sure if it's correct but this is my approach; the additional \$1000 x is hypothetical. Before the \$1000 was in the picture, there was economic stability, so she didn't have to make a "choice" whether to spend or save (maybe she was using her stable in a fixed manner perhaps buying more fertilizer, hiring labor, etc.)

But the MPC is applied to her new "extra" income. Now she can make a "choice", and we the economists have observed that given a choice, the farmer would spend a fraction (MPC) of the new income.

When the government decides to levy tax, they are deducting regardless of economic stability or "extra income". The farmer may or may not have an extra \$1000 when the taxes are levied.
(1 vote)
• Something is wrong about this video. Please check it.In my opinion, the formula must be Δx = -ΔT.MPC. Even if it is not, can you explain it more clearly?
• As 5 people have mentioned here at Khan Academy, and another person in YouTube comments, at the formula

X = -Δt * MPC

shouldn't be allowed.

In the video it is established that the variable X is a positive number, as well as the MPC being a positive number between 0 and 1.

I'm not aware of the correct formula in economics, but it's not possible to combine a negative factor (-Δt) and a positive factor (MPC) to create a positive product (X). I may be entirely wrong and Δt is negative if the government is taxing negative dollars, but taxing a negative amount in generally not the case. Δt is not explained in the video, nor is the formula

X = -Δt * MPC.

I believe it would benefit users to remove this video for the time being, seeing as a large part of it is unclear.

Nevertheless, I am inspired by Khan Academy's affect on the world and education as a whole. To whomever is reading this, thank you for your contribution and have a great day.
• This video does not make much sense, it says x = -ΔT * MPC, but that would not make sense, she is paying the builder negative dollars? What about the money she actually has, this only counts the decrease caused by the tax. Secondly, ΔT will not be the same for every transaction, how come there was no mention of a Tax Rate or something, so that you can establish what ΔT really means in each context?

• This video is terrible. It just confuses you talking about geometric series and some obscure beating around the bush equation. Dislike.
• Let's say I spend 30% of my income (and save 70%). If the government taxes me more, not only I will have less income but I will think that's better to save more. So the more Government tax people, the more their MPC gets smaller. If after taxes and my regular expenses (household, food, etc..) I am left with 1\$ I'll probably not spend 30% but just keep it because.. you never know
• That's a valid point. When the government taxes individuals more, it reduces their disposable income and consequently their ability to save or spend. This can lead to a decrease in the marginal propensity to consume (MPC), which is the percentage of additional income that people typically spend.

If your income after taxes and regular expenses leaves you with only \$1, it is understandable that you might choose to save that amount rather than spend 30% of it. People tend to prioritize saving for unexpected expenses or future needs, especially when their disposable income is limited.

Overall, an increase in government taxes can potentially lead to a decrease in consumption and a higher propensity to save, which impacts the economy's overall spending levels.
(1 vote)
• Isn't X=delta t? Because as Khan explains, we could think it that way: if one get same amount of money as the tax, then x/1-c is the total amount contributed to the output, and as the money is gone, one would not spend that amount of money, then shouldn't the x here equals to delta t instead of delta t times MPC?