Assertion (A): The tax multiplier is a negative multiplier.
Reason (R): The tax multiplier is smaller in absolute value than the government expenditure multiplier.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Assertion (A): The tax multiplier is a negative multiplier. — True. Income moves opposite to taxes. Its value is −c ÷ (1 − c).
Reason (R): The tax multiplier is smaller in absolute value than the government expenditure multiplier. — True. Taxes work only through disposable income. In the first round, a tax cut of ΔT raises spending by cΔT, not by the full ΔT.
Why R does not explain A?
R compares the size of the two multipliers; A is about the sign of one of them. The real explanation of A: a tax cut raises consumption and output, and a tax increase reduces them, so the multiplier carries a minus sign.
NCERT (2026-27): “Box 5.1: Fiscal Policy Because a tax cut (increase) will cause an increase (reduction) in consumption and output, the tax multiplier is a negative multiplier. Comparing equation (5.6) and (5.8), we find that the tax multiplier is smaller in absolute value compared to the government spending multiplier. This is because an increase in government spending directly affects total spending whereas taxes enter the multiplier process through their impact on disposable income, which influences household consumption (which is a part of total spending). Thus, with a ΔT reduction in taxes, consumption, and hence total spending, increases in the first instance by cΔT. …” |