Question 1

The tax multiplier is calculated as "one minus the government purchases multiplier."

Accepted Answer

The tax multiplier is calculated as the negative government purchases multiplier divided by the marginal propensity to consume.

Question 2

Suppose that the current equilibrium GDP is $14.5 trillion and that potential GDP is $14.3 trillion.Will decreasing government purchases by $200 billion,or raising taxes by $200 billion,restore the economy to potential GDP? Explain.

Accepted Answer

The answer of Suppose that the current equilibrium GDP is...

Question 3

In absolute value,the tax multiplier is greater than the government purchases multiplier.

Accepted Answer

The government purchases multiplier is typically larger in absolute value than the tax multiplier because every dollar of government spending directly increases aggregate demand by the full amount, while tax cuts indirectly affect aggregate demand through the increase in household disposable income, part of which may be saved rather than spent.

Question 4

If government increases taxes by the same amount it increases government spending,there will be no effect on aggregate demand: the increase in government spending is offset by an equal decrease in consumption spending by households.

Accepted Answer

If the government increases taxes by the same amount it increases government spending, there will be a negative effect on aggregate demand as the decrease in consumption spending by households will not be equal to the increase in government spending. This is because households are likely to spend less due to higher taxes, while government spending may not fully stimulate the economy.

Question 5

Suppose Political Party A proposes a tax cut on business income to stimulate the economy.Political Party B opposes the tax cut on business income asserting that it would only help businesses,not the average working man and woman.If you were hired as an economist for Political Party A,explain how the tax cut on business income would help the average working man and woman.

Accepted Answer

The answer of Suppose Political Party A proposes a tax...

Question 6

The Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because

Accepted Answer

The Federal Reserve can quickly change monetary policy through adjusting interest rates and the money supply, while Congress and the president must go through a longer legislative process to change fiscal policy through government spending and taxes.

Question 7

Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier?

Accepted Answer

The answer of Why would a higher tax rate lower...

Question 8

Explain why the tax multiplier is different from the government purchases multiplier,in both sign and relative magnitude.

Accepted Answer

The answer of Explain why the tax multiplier is different...

Question 9

The use of fiscal policy to stabilize the economy is limited because

Accepted Answer

The legislative process can be slow and difficult, which means that it is difficult to make fiscal policy actions in a timely way. This limits the effectiveness of fiscal policy in stabilizing the economy.

Question 10

A tax rebate,which is expected to be offered in this and all future years,will

Accepted Answer

A tax rebate typically increases disposable income for consumers, leading to an increase in consumption. This increase in consumption boosts aggregate demand. Moreover, through the multiplier effect, the initial increase in spending from the tax rebate can lead to a larger overall increase in aggregate demand, as the initial spending circulates through the economy.

Question 11

Describe the differences (in sign and relative magnitude)between the government purchases multiplier and the tax multiplier.

Accepted Answer

The answer of Describe the differences (in sign and relative...

Question 12

Suppose real GDP is $13 trillion and potential real GDP is $13.5 trillion.If Congress and the president increase government purchases by $500 billion,then the economy will be brought to equilibrium at potential real GDP.

Accepted Answer

It is not necessary that a $500 billion increase in government purchases will bring the economy to equilibrium at potential real GDP. The impact on the economy would also depend on other factors such as the multiplier effect, inflation, and the response of other economic agents.

Question 13

Crowding out refers to a decline in ________ as a result of an increase in ________.

Accepted Answer

Crowding out occurs when increased government spending leads to a reduction in private sector spending. This happens because government borrowing to finance its expenditures can lead to higher interest rates, which in turn discourages private investment.

Question 14

An increase in the sensitivity of private spending (consumption,investment,and net exports)to changes in the interest rate ________ the government purchases multiplier.

Accepted Answer

The government purchases multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. As the sensitivity of private spending to interest rate changes increases, the MPC will decrease since households and firms will save more in response to higher interest rates. This means that the denominator in the multiplier formula will get smaller, making the multiplier larger. Therefore, if the sensitivity of private spending to interest rate changes increases, the government purchases multiplier will decrease.

Question 15

The crowding out of private spending by government spending will be greater the

Accepted Answer

When consumption, investment, and net exports are more sensitive to changes in interest rates, it means that these private spending components are more responsive to changes in the cost of borrowing due to interest rate changes. Therefore, an increase in government spending that leads to higher interest rates will have a greater crowding-out effect on private spending because the cost of borrowing for private firms and households will increase more and dampen their consumption and investment spending. This results in a higher likelihood of crowding out of private spending by government spending.

Question 16

If real GDP is $300 billion below potential GDP and the tax multiplier equals -1.5,then how much would the government need to change taxes to bring the economy to equilibrium at potential?

Accepted Answer

The answer of If real GDP is $300 billion below...

Question 17

Suppose real GDP is currently $12.5 trillion and potential real GDP is $13 trillion.If the president and the Congress increased government purchases by $500 billion,what would be the result on the economy?

Accepted Answer

The answer of Suppose real GDP is currently $12.5 trillion...

Question 18

The multiplier effect following an increase in expenditure is generated by induced increases in consumption expenditure as income rises.

Accepted Answer

The multiplier effect is generated by induced increases in consumption expenditure as income rises, which results in a further increase in aggregate demand and income.

Question 19

In the case of an upward-sloping aggregate supply curve,the change in real GDP brought about by a change in government spending will be less than that predicted by the simple government purchases multiplier.

Accepted Answer

Due to the upward sloping aggregate supply curve, an increase in government spending will lead to a rise in prices, reducing the purchasing power of the people and ultimately reducing the impact of the multiplier. Therefore, the change in real GDP will be less than what is predicted by the simple government purchases multiplier.

Question 20

What economic impact would the closing of a nearby military base have on a town? Would people and businesses that did not directly deal with the military personnel be affected?

Accepted Answer

The answer of What economic impact would the closing of...

Quiz 16: Fiscal Policy