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The Case:

When President Barack Obama took office in January 2009, the economy was suffering from a significant recession. Even before he was inaugurated, the president and his advisers proposed a substantial stimulus package to increase aggregate demand. As proposed, the package would cost the federal government about $800 billion, or about 5% of annual GDP. The package included some tax cuts and higher transfer payments, but much of it was made up of increases in government purchases of goods and services. Professional economists debated the merits of the plan. Supporters of the Obama plan argued that increased spending was better than reduced taxes because, according to standard Keynesian theory, the tax multiplier is smaller than the government spending multiplier. According to an analysis by Obama administration economists, the government spending multiplier was 1.57, whereas the tax multiplier was only 0.99 at that time. Thus, they argued that increased government spending on roads, schools, and other infrastructure was the better route to increase aggregate demand and create jobs.


Being student of macroeconomics, analyze the above case of American economy and recall the Keynesian theory of income and employment, discuss why the tax multiplier is smaller than the government spending multiplier in an economy in general.

Note: Be specific and precise. Write answer according to the requirement. Avoid irrelevant and extra details.

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