Assume that the marginal propensity to consume is 0.8. The tax multiplier will then be ............... ?

Option 1: 4 -> This is the absolute value but ignores the negative sign that characterizes tax multipliers.

Option 2: -4 -> This is calculated using the tax multiplier formula: -MPC/(1-MPC) = -0.8/(1-0.8) = -0.8/0.2 = -4.

Option 3: -5 -> This confuses the tax multiplier with the negative of the spending multiplier.

Option 4: 5 -> This is the spending multiplier (1/(1-MPC)), not the tax multiplier.

Hence, Option 2: -4 -> The tax multiplier formula is -MPC/(1-MPC). With MPC = 0.8, we get -0.8/0.2 = -4. The negative sign indicates that an increase in taxes reduces aggregate demand and output. The tax multiplier is always negative and smaller in absolute value than the spending multiplier because a tax change has an indirect effect on spending (it first affects disposable income, then consumption), whereas government spending directly affects aggregate demand. -> correct