Why don’t identical shifts in government spending and taxes have the same effect on GDP?
What will be an ideal response?
A change in government spending causes a direct shift in the aggregate expenditures curve equal to that change in spending. A change in taxes, however, will not have an equivalent shift in the AE curve because taxes have an effect on both consumption and savings, and the total effect of the two is the net effect of taxes. Since the change in consumption is the only effect that will be reflected in the AE curve, as savings is not included in that curve, the shift in AE from a change in taxes will be smaller than the total effect of a change in taxes. Thus a change in taxes will have less of an effect on GDP as an identical change in government spending.
You might also like to view...
A monopsony
A. Is a market in which there is a only one buyer. B. Occurs when buyers have declining long-run average costs. C. Is a market in which there is a single seller. D. Occurs when sellers have declining long-run average costs.
If the marginal propensity to consume (MPC) is 0.75 and there is an increase in planned investment spending of $1 trillion, then saving will
A. increase by $0.5 trillion. B. increase by $1 trillion. C. increase by $1.5 trillion. D. remain unchanged.
A major benefit of a health savings account is that it
A) combats moral hazard. B) means more health care services will be demanded. C) eliminates rising health care costs. D) creates the incentive to see a doctor regularly.
Refer to Table 11-1. What is the average product of labor when the farm hires 5 workers?
A) 4 pounds B) 10.8 bushels C) 38.2 pounds D) 54 pounds