Step 1: Understanding the multiplier effect.
The multiplier effect quantifies the change in national income resulting from an initial change in aggregate demand. Taxes diminish disposable income, subsequently decreasing consumption and thereby reducing the multiplier effect.
Step 2: Analysis of options.
- (A) Income taxes reduce the multiplier effect: This is accurate. Increased income taxes decrease disposable income and, consequently, consumption, leading to a lower multiplier effect.
- (B) The inclusion of taxes makes the aggregate demand curve steeper, thereby increasing the multiplier: This is inaccurate. Taxes reduce disposable income, which flattens the aggregate demand curve, not steepens it. This diminishes, rather than increases, the multiplier.
- (C) Income taxes decrease the induced increase in consumption resulting from changes in income: This is accurate. Higher income taxes reduce disposable income levels and, consequently, consumption.
- (D) Fluctuations in investment demand have a lesser impact on output when automatic stabilizers, such as proportional income tax, are implemented: This is accurate. Automatic stabilizers, like proportional taxes, effectively mitigate the impact of investment demand swings.
Step 3: Conclusion.
Statement (B) is incorrect because taxes reduce the multiplier effect and lead to a less steep aggregate demand curve.