Question 1

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 2

Illustrate and explain the effects of tax reduction and simplification using the dynamic aggregate demand and supply model.To simplify the analysis,assume that aggregate demand is not affected by the tax cut.

Accepted Answer

The answer of Illustrate and explain the effects of tax...

Question 3

In an open economy,the government purchases multiplier will be larger the

Accepted Answer

The government purchases multiplier in an open economy will indeed be larger when the marginal propensity to import is smaller (because less of the additional income generated by government spending leaks out of the economy through imports), when the marginal income tax rate is smaller (because a smaller portion of additional income is taxed away, leaving more to be spent), and when the marginal propensity to consume is larger (because more of the additional income will be spent, further stimulating the economy). All these factors reduce the leakage from the circular flow of income, thereby amplifying the impact of government spending on the economy.

Question 4

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

Accepted Answer

The marginal propensity to import measures how much of each additional dollar of income is spent on imports, rather than domestically produced goods and services. A higher marginal propensity to import means that a smaller proportion of the additional income is spent domestically and a larger proportion is spent on imports. This reduces the impact of government purchases on domestic output and employment, and therefore leads to a smaller government purchases multiplier.

Question 5

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 and invest, which leads to an increase in overall spending and a larger government purchases multiplier effect.

Question 6

Suppose President Obama is successful in passing a $10 billion tax increase.Assume that taxes are fixed,the economy is closed,and the marginal propensity to consume is 0.8.What happens to equilibrium GDP?

Accepted Answer

Since the marginal propensity to consume is 0.8, a tax increase of $10 billion would result in a decrease in consumption spending of $8 billion (0.8 x $10 billion). This decrease in consumption spending would lead to a decrease in equilibrium GDP of 4 times the initial change in spending, or $32 billion (4 x $8 billion). Therefore, the total change in equilibrium GDP would be a decrease of $40 billion ($32 billion decrease in consumption spending plus $10 billion tax increase).

Question 7

Suppose that Congress allocates $1 billion to clean up after the hurricanes of 2005.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 increase in government spending (clean up after hurricanes) will lead to an increase in aggregate demand, which will lead to an increase in equilibrium GDP by a multiplier of 1/(1-MPC). In this case, the MPC is 0.9, so the multiplier is 1/(1-0.9) = 10. Thus, an increase in government spending by $1 billion will lead to an increase in equilibrium GDP by $10 billion. However, the tax increase will offset this increase in government spending, so the net effect on equilibrium GDP will only be $1 billion, the initial amount allocated to clean up after the hurricanes. Therefore, the correct answer is D.

Question 8

Suppose President Obama 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

With a $5 billion tax increase, there will be a decrease in disposable income for consumers. Since the marginal propensity to consume is 0.75, for every dollar decrease in disposable income, the consumption spending will decrease by $0.75. This will then cause a decrease in aggregate demand, leading to a decrease in equilibrium GDP. The decrease in GDP will be the product of the multiplier effect: 1/(1-MPC) = 1/(1-0.75) = 4. Therefore, the decrease in equilibrium GDP will be $5 billion x 4 = $20 billion. However, the question asks for the net effect on GDP, not just the effect of the tax increase, so we need to subtract the $5 billion from the $20 billion to get the net effect on GDP, which is a decrease of $15 billion.

Question 9

Assume a closed economy with fixed taxes and the marginal propensity to consume is equal to 0.9.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 0.9 is calculated as 1/(1-MPC) = 1/(1-0.9) = 1/0.1 = 10.

Question 10

Suppose that Congress allocates $5 billion to an "energy-efficient appliance rebate" program.It also raises taxes by $5 billion to keep the deficit from growing.If the marginal propensity to consume is 0.8,what is the effect on equilibrium GDP?

Accepted Answer

Since the marginal propensity to consume is 0.8, for every dollar of increased disposable income, consumers will spend 80 cents and save 20 cents.

With the energy-efficient appliance rebate program, consumers will receive a boost in disposable income from the rebate, which they are likely to spend, increasing aggregate demand.

Assuming the tax increase does not significantly impact consumer spending, the GDP multiplier is 1/ (1-MPC) = 1/(1-0.8) = 5.

Therefore, the $5 billion increase in spending from the rebate program will increase equilibrium GDP by 5 x $5 billion = $25 billion.

Thus, the correct answer is D, GDP increases by $5 billion.

Question 11

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 12

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

Accepted Answer

The balanced budget government purchases multiplier is always 1 in a closed economy with fixed or autonomous taxes. This means that an increase in government purchases leads to an equal increase in output and income, but the increase in income is offset by a decrease in private consumption due to higher taxes. Therefore, the net effect on aggregate demand is zero, and the multiplier is not negative.

Question 13

In an open economy,the government purchases multiplier will be

Accepted Answer

In an open economy, some portion of government purchases leak out of the economy in the form of imports. So, the larger the marginal propensity to import, the smaller the government purchases multiplier will be. Therefore, as the marginal propensity to import decreases, the government purchases multiplier will be larger.

Question 14

What is the government purchases multiplier if the tax rate is 0.2 and the marginal propensity to consume is 0.8? Assume the economy is closed.

Accepted Answer

The government purchases multiplier is calculated as 1 / (1 - MPC * (1 - tax rate)). Plugging in the values, we get 1 / (1 - 0.8 * (1 - 0.2)) = 1 / (1 - 0.8 * 0.8) = 1 / (1 - 0.64) = 1 / 0.36 = 2.78.

Question 15

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75,the tax rate is 0.2,and the marginal propensity to import equals 0.3.

Accepted Answer

The government purchases multiplier is given by the formula: 
1 / (1 - (MPC*(1-T) + MPM))
where MPC is the marginal propensity to consume, T is the tax rate, and MPM is the marginal propensity to import. 
Substituting the given values, we get: 
1 / (1 - (0.75*(1-0.2) + 0.3)) = 1 / (1 - 0.675) = 1 / 0.325 = 3.08 
Therefore, the government purchases multiplier is approximately 3.08, which is closest to choice A (1.43 when rounded to two decimal places).

Question 16

In an open economy,the government purchases multiplier will be smaller the

Accepted Answer

The answer of In an open economy,the government purchases multiplier...

Question 17

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.

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Question 18

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 19

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 20

Show the impact of tax reduction and simplification using the dynamic aggregate demand and aggregate supply model.Clearly show and identify the impact of the tax change.Assume that aggregate demand and short-run aggregate supply shift as they typically do in the dynamic model.Show what happens to the price level and real GDP because of the tax change.

Accepted Answer

The answer of Show the impact of tax reduction and...

Quiz 16: Fiscal Policy

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.

Illustrate and explain the effects of tax reduction and simplification using the dynamic aggregate demand and supply model.To simplify the analysis,assume that aggregate demand is not affected by the tax cut.

In an open economy,the government purchases multiplier will be larger the

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

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

Suppose President Obama is successful in passing a $10 billion tax increase.Assume that taxes are fixed,the economy is closed,and the marginal propensity to consume is 0.8.What happens to equilibrium GDP?

Suppose that Congress allocates $1 billion to clean up after the hurricanes of 2005.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?

Suppose President Obama 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?

Assume a closed economy with fixed taxes and the marginal propensity to consume is equal to 0.9.What is the government spending multiplier?

Suppose that Congress allocates $5 billion to an "energy-efficient appliance rebate" program.It also raises taxes by $5 billion to keep the deficit from growing.If the marginal propensity to consume is 0.8,what is the effect on equilibrium GDP?

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?

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

In an open economy,the government purchases multiplier will be

What is the government purchases multiplier if the tax rate is 0.2 and the marginal propensity to consume is 0.8? Assume the economy is closed.

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.75,the tax rate is 0.2,and the marginal propensity to import equals 0.3.

In an open economy,the government purchases multiplier will be smaller the

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.

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.

In an open economy,the government purchases multiplier will be