The IS model implies that a dollar of government spending has a larger impact on equilibrium output than does a dollar of taxes. Explain
What will be an ideal response?
In the IS equation, government purchases are a component of autonomous spending, no different than autonomous consumption, investment, and net exports. From the perspective of producers, a customer is a customer. Taxes, clearly, are not an expenditure. Taxes affect expenditure by reducing disposable income and, thus, consumption. Since only a fraction of disposable income is spent for consumption — a fraction measured as the marginal propensity to consume — each dollar of taxes corresponds to a fraction of a dollar taken from consumption expenditure.
You might also like to view...
The Folk Theorem says that anything can happen in infinitely repeated games.
Answer the following statement true (T) or false (F)
The goal of maximum sustainable employment is roughly equivalent to achieving ________
A) the natural rate of unemployment B) an inflation target that is slightly above zero C) the elimination of frictional and structural unemployment D) all of the above E) none of the above
In the consumer-choice model, the economist examines how the consumer's purchases change when there is a change in prices or income. Which stage of economic analysis is this procedure a part of?
a. Formulation. b. Optimization. c. Equilibrium. d. Economic dynamics.
Income tax collections:
A. fall during periods of prosperity, thus increase federal budget deficits. B. rise during periods of prosperity, thus reduce federal budget deficits. C. fall during recessions, thus increase the problem of unemployment. D. rise during recessions, thus increase the problem of unemployment.