Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier.

The tax multiplier is smaller in absolute value than the government expenditure multiplier because the government expenditure affects the total expenditure and taxes through the multiplier.

The tax multiplier also influences the disposable income which affects the overall consumption level.

Let us explain it with the help of an example -

Suppose MPC (c) is 0.60

Government expenditure multiplier = 1/1-c

= 1/1-0.6

= 2.5

Tax multiplier = - c/1-c

= - 0.6 /1-0.6

= - 1.5

This shows that government expenditure multiplier is more than the tax multiplier.