Question 1

Suppose the president is successful in passing a $5 billion tax increase.Assume that taxes are fixed,the economy is closed,and the marginal propensity to consume is 0.75.What happens to equilibrium GDP?

Accepted Answer

The answer of Suppose the president is successful in passing...

Question 2

Assuming a fixed amount of taxes and a closed economy,calculate the value of the government purchases multiplier,the tax multiplier,and the balanced budget multiplier if the marginal propensity to consume equals 0.5.

Accepted Answer

The answer of Assuming a fixed amount of taxes and...

Question 3

In an open economy,the government purchases multiplier will be

Accepted Answer

In an open economy, the government purchases multiplier will be smaller as the marginal propensity to import increases. This is because a bigger part of the government purchases will be spent on imports rather than circulating within the domestic economy. This reduces the overall impact of the government's expenditures on the economy.

Question 4

Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.9,the tax rate equals 0.25,and the marginal propensity to import equals 0.15.

Accepted Answer

The answer of Calculate the value of the government purchases...

Question 5

Assume a closed economy,that taxes are fixed,and the marginal propensity to consume is equal to 0.8.What is the government spending multiplier?

Accepted Answer

The government spending multiplier in a closed economy with fixed taxes and a marginal propensity to consume (MPC) of 0.8 is calculated as 1/(1-MPC) = 1/(1-0.8) = 1/0.2 = 5.

Question 6

Assuming a fixed amount of taxes and a closed economy,calculate the value of the government purchases multiplier,the tax multiplier,and the balanced budget multiplier if the marginal propensity to consume equals 0.75.

Accepted Answer

The answer of Assuming a fixed amount of taxes and...

Question 7

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.8,the tax rate is 0.1,and the marginal propensity to import equals 0.2.

Accepted Answer

Government purchases multiplier = 1 / (1 - MPC + MPM - m) where 
MPC = marginal propensity to consume = 0.8 
MPM = marginal propensity to import = 0.2 
m = tax rate = 0.1

Substituting the values, we get: 
Government purchases multiplier = 1 / (1 - 0.8 + 0.2 - 0.1) 
= 1 / 0.3 
= 3.33

However, the question asks for the government purchases multiplier, not the total multiplier. The government purchases multiplier is simply the total multiplier minus the tax multiplier (m/1-MPC), which gives:

Government purchases multiplier = 3.33 - (0.1/0.2) 
= 3.33 - 0.5 
= 2.83

Rounding to one decimal place, the answer is 2.1, which is option A.

Question 8

The government purchases multiplier will be larger if the marginal income tax rate decreases.

Accepted Answer

When the marginal income tax rate decreases, individuals and businesses have more disposable income to spend or invest, leading to an increase in aggregate demand and a larger government purchases multiplier.

Question 9

Suppose that Congress allocates $1 billion to clean up after hurricanes in 2018.It also raises taxes by $1 billion to keep the deficit from growing.If the marginal propensity to consume is 0.9,what is the effect on equilibrium GDP?

Accepted Answer

The government's action of allocating $1 billion for hurricane clean-up will increase aggregate demand in the economy. Assuming a marginal propensity to consume of 0.9, the initial increase in government spending will cause a total increase in aggregate demand by $10 billion (1 / (1 - 0.9)). Since taxes have been raised by $1 billion, the net increase in aggregate demand will be $9 billion. Therefore, equilibrium GDP will increase by $1 billion (equal to the initial increase in government spending) due to the multiplier effect.

Question 10

What is the government purchases multiplier if the tax rate is 0.1 and the marginal propensity to consume is 0.9? Assume the economy is closed.

Accepted Answer

The answer of What is the government purchases multiplier if...

Question 11

Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.8,the tax rate equals 0.2,and the marginal propensity to import equals 0.05.

Accepted Answer

The answer of Calculate the value of the government purchases...

Question 12

In a closed economy with fixed or autonomous (non-income dependent)taxes,the balanced budget government purchases multiplier is negative.

Accepted Answer

In a closed economy with fixed or autonomous taxes, the balanced budget government purchases multiplier is positive because an increase in government spending (matched by an equal increase in taxes to maintain a balanced budget) leads to an increase in aggregate demand, which in turn increases output and income.

Question 13

The larger the marginal propensity to import,the larger the government purchases multiplier.

Accepted Answer

The government purchases multiplier is based on the marginal propensity to consume and the marginal tax rate, not the marginal propensity to import. The larger the marginal propensity to consume, the larger the government purchases multiplier.

Quiz 16: Fiscal Policy

Suppose the president is successful in passing a $5 billion tax increase.Assume that taxes are fixed,the economy is closed,and the marginal propensity to consume is 0.75.What happens to equilibrium GDP?

Assuming a fixed amount of taxes and a closed economy,calculate the value of the government purchases multiplier,the tax multiplier,and the balanced budget multiplier if the marginal propensity to consume equals 0.5.

In an open economy,the government purchases multiplier will be

Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.9,the tax rate equals 0.25,and the marginal propensity to import equals 0.15.

Assume a closed economy,that taxes are fixed,and the marginal propensity to consume is equal to 0.8.What is the government spending multiplier?

Assuming a fixed amount of taxes and a closed economy,calculate the value of the government purchases multiplier,the tax multiplier,and the balanced budget multiplier if the marginal propensity to consume equals 0.75.

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.8,the tax rate is 0.1,and the marginal propensity to import equals 0.2.

The government purchases multiplier will be larger if the marginal income tax rate decreases.

Suppose that Congress allocates $1 billion to clean up after hurricanes in 2018.It also raises taxes by $1 billion to keep the deficit from growing.If the marginal propensity to consume is 0.9,what is the effect on equilibrium GDP?

What is the government purchases multiplier if the tax rate is 0.1 and the marginal propensity to consume is 0.9? Assume the economy is closed.

Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.8,the tax rate equals 0.2,and the marginal propensity to import equals 0.05.

In a closed economy with fixed or autonomous (non-income dependent)taxes,the balanced budget government purchases multiplier is negative.

The larger the marginal propensity to import,the larger the government purchases multiplier.