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    Taxes and the multiplier model

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    Please help. I need detailed information on the following:

    If taxes are lowered how will it affect the multiplier, AD, GDP, prices and tax revenue?

    Also, how are taxes incorporated into the multiplier? (I am not sure what the word "incorporated" is referring to and cannot seem to get a straight answer.)

    I have already downloaded the 'library solutions' that relate to these questions, but still cannot get a clear handle on it. I am very "clueless" about these concepts, so please spell this out in as basic terms as possible.

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    Solution Preview

    Taxes affect the multiplier through disposable income. Thus, the tax multiplier would be -MPC/ (1-MPC). A reduction in taxes has the opposite effect on economic output, so there is a negative sign. Thus reducing taxes would create a positive change in Y, but it does so to a lesser degree than a direct injection of income would do so. This is because the nominator of the tax multiplier, MPC, is always less ...

    Solution Summary

    Taxes and the multiplier model, GDP, prices, and AD are discussed in this solution.