Explain why the tax multiplier is different from the government purchases multiplier, in both sign and relative magnitude
What will be an ideal response?
A dollar change in government purchases has the opposite impact of a dollar change in taxes. For example, an increase in government purchases increases income, spending, and GDP in the economy. In contrast, an increase in taxes lowers income, spending, and GDP in the economy. As a result, the government purchases multiplier is positive, and the tax multiplier is negative.
A dollar change in government purchases will have a larger affect on GDP as compared to a dollar change in the tax multiplier. A change in government purchases affects overall spending directly. The first round GDP change in the multiplier process will be equal to this change in spending. In contrast, a change in taxes affects income first and then spending. For example, a tax cut will increase income, but not all of that income will be spent; some of it is saved. The fraction of income that is spent is the MPC times the income change. The first round GDP change in the multiplier process will be equal to this smaller change in spending. Hence, a decrease in taxes will have a smaller impact on equilibrium than would an increase in government purchases.
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Resource use is allocatively efficient if the
A) total cost of what the resource produces is less than the total benefit of what is produced. B) total cost of what the resource produces is equal to the total benefit of what is produced. C) marginal benefit of what the resource produces has diminished to zero. D) marginal cost of what the resource produces is equal to the marginal benefit of what is produced.
In a natural monopoly, throughout the range of market demand
A) marginal cost is above average total cost and pulls average total cost upward. B) marginal cost is below average total cost and pulls average total cost downward. C) there are diseconomies of scale. D) average total cost is above marginal cost and pulls marginal cost upward.
Which of the following instances will total revenue or receipts decline?
A) Price rises and demand is inelastic. B) Price falls and demand is elastic. C) Price rises and demand is elastic. D) Price falls and demand is unit elastic.
Ceteris paribus, when market interest rates ________, firms undertake ________ investment projects.
A. increase; more B. decrease; less C. increase; fewer D. decrease; no