Why is the tax multiplier negative?

A tax rise cuts disposable income, so consumption and then output fall through the chain of spending.

Why does the balanced budget multiplier equal one?

The direct effect of extra spending outweighs the contraction from an equal tax rise, leaving a net gain equal to the spending increase.

S6 Economics Fiscal Policy, Paper 3: multiplier arithmetic, balanced budget and tax rate changes

2026-11-02

Tutor Prep Guide · Primary English

Ten graded items on the budget balance, spending and tax multipliers, tax payable, the spending ratio, the deficit ratio and a balanced budget change, each with an answer.

Focus　The spending multiplier is one over one minus MPC, the tax multiplier is minus MPC over one minus MPC, the balanced budget multiplier is one, and ratios divide before multiplying by 100.

01　Paper details (check answers afterwards)

Item	Detail
Questions	10
Suggested time	25
Difficulty mix	Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1
Chapter	Chapter: S6 Economics: Fiscal Policy
Level	Four basic, three advanced, two challenge and one error-repair item

02　Questions (10 items)

FoundationGovernment revenue is $52 billion and spending is $47 billion. What is the budget balance?
FoundationThe marginal propensity to consume is 0.8. Find the government spending multiplier and the rise in output from $6 billion of extra spending.
FoundationWith a marginal propensity to consume of 0.8, find the tax multiplier and the effect on output of a $5 billion tax cut.
FoundationA taxpayer has assessable income of $50,000 taxed at 16%. How much tax is payable?
IntermediateGovernment spending is $180 billion and GDP is $450 billion. What share of GDP is government spending?
IntermediateThe fiscal deficit is $12 billion and GDP is $300 billion. What is the deficit ratio?
IntermediateWith a marginal propensity to consume of 0.75, compare the output effect of $8 billion more spending against an $8 billion tax cut.
ChallengeGovernment spending and taxes both rise by $10 billion with a marginal propensity to consume of 0.8. What is the net effect on output?
ChallengeThe tax rate rises from 15% to 18% on assessable income of $240,000. By how much does the tax bill rise?
Error redoError repair: a student writes that the government spending multiplier equals 1 divided by the marginal propensity to consume. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	A surplus of $5 billion	Revenue minus spending is 50, a positive figure meaning a surplus.
2	A multiplier of 5 and a rise of $30 billion	The multiplier is 1 divided by 0.2, which is 5, and 60 times 5 is 300.
3	A multiplier of -4 and a rise of $20 billion	The tax multiplier is minus MPC over one minus MPC, which is minus 4, so a 5 billion cut raises output by 20 billion.
4	$8,000	Fifty thousand times 0.16 is 8,000.
5	40%	1,800 divided by 4,500 is 0.40, or 40 per cent.
6	4%	120 divided by 3,000 is 0.04, or 4 per cent.
7	Spending adds $32 billion while the tax cut adds $24 billion	The spending multiplier is 4 and the tax multiplier minus 3, so direct spending packs a bigger punch for the same 8 billion.
8	A net rise of $10 billion	Spending contributes plus 500 and the tax rise minus 400, leaving a net gain equal to the 100 billion, so the balanced budget multiplier is 1.
9	From $36,000 to $43,200, a rise of $7,200	Fifteen per cent of 240,000 is 36,000 and 18 per cent is 43,200, a difference of 7,200.
10	It should be 1 divided by one minus the marginal propensity to consume, giving 5 rather than 1.25	With a marginal propensity of 0.8 the multiplier is 1 divided by 0.2, or 5, not 1 divided by 0.8, which is only 1.25.

04　What to do after marking

After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
Repeat the same item two days later; move to the next paper only when both attempts are correct.
Parents only need the answer and note columns; there is no need to explain every item.

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