Why might the tax multiplier be smaller than the expenditure multiplier? Under what circumstances might the reverse be true?
What will be an ideal response?
In the IS model, tax rate changes affect aggregate demand indirectly by influencing consumption. The size of the effect depends on the marginal propensity to consume, which is necessarily smaller than one. Government spending increases are directly and completely additions to aggregate demand. Reversal of the relative size of these multipliers is possible, because of further indirect and expectations-related effects. An expectation of future tax increases or an increase in the real interest rate reduces the size of both multipliers. If a tax cut is interpreted as a signal of an enduring commitment to lower taxes, then the tax multiplier might better resist this erosion and wind up larger in absolute value than the expenditure multiplier.
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A decrease in the demand for eggs results in a surplus of eggs at the original equilibrium price. Explain how market forces will act to eliminate the surplus
What will be an ideal response?
Economists who are concerned with the effect of fiscal policy on the ability of households and firms to borrow to finance consumption will focus on ________, and economists who want to know whether the government's fiscal policy is sustainable will
focus on ________. A) yearly budget deficits; the federal debt B) the federal debt; yearly budget deficits C) yearly budget deficits; both the federal debt and yearly budget deficits D) the federal debt; both the federal debt and yearly budget deficits
Which of the following factors that affect our well-being does GDP fail to adequately account for?
a. changes in the quality of goods b. externalities c. leisure d. all of the above
Economist Charles Kindleberger (a proponent of fixed exchange rates mentioned in the text) would agree with which of the following statements?
A) It is better to leave the international value of the domestic currency to the free market forces than to have to sacrifice domestic economic goals in order to support a certain predetermined value of the currency. B) There is too great a chance that the supported exchange rates will diverge significantly from the equilibrium exchange rates, which would create persistent problems and lead to an overall decrease in international trade. C) With no certainty of what one nation's currency will be worth in terms of other nations' currencies, international trade is held below what it could be. D) a and b