Why is the tax cut multiplier different from the purchases multiplier?
What will be an ideal response?
When the government spends money to buy goods and services in the product market, aggregate demand increases initially by the amount of the government expenditure. Then the multiplier process begins, and consumers spend an additional amount equal to the initial expenditure times the MPC. When the government cuts taxes, disposable income increases initially. Consumers spend part of the tax cut and save the other part. Since the MPC is usually less than 1, the initial spending injection is less. As a result, a tax cut has less impact than a government spending increase of the same amount.
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In the intertemporal model with money, the optimal amount of money is
A) equal to total output. B) equal to consumption and investment. C) zero. D) irrelevant as long as it is not zero.
Under a fixed exchange rate system, at low domestic real interest rates the demand for domestic currency ________, so the central bank ________ foreign-exchange reserves
A) increases; acquires B) increases; loses C) decreases; acquires D) decreases; loses
The government may choose to do nothing to reduce monopoly inefficiency because the "fix" may be worse than the problem
a. True b. False Indicate whether the statement is true or false
A simple linear demand function may be stated as Q = a - bP + cI where Q is quantity demanded, P is the product price, and I is consumer income. To compute an appropriate value for c, we can use observed values for Q and I and then set the estimated income elasticity of demand equal to:
What will be an ideal response?