What is the effect of an increase in taxes when the economy is above full employment? What is the magnitude of the tax multiplier?An increase in taxes when the economy is above full employment _______ aggregate demand and real GDP, and the price level _______. A.increases; falls B.increases; rises C.does not change; does not change D.decreases; fallsThe magnitude of the tax multiplier is equal to _______. A.MPC times the government expenditure multiplier B.the government expenditure multiplier divided by MPC C.MPC D.the government expenditure multiplier

The aggregate demand curve or AD curve shows different combinations of price and output where both goods market and money market and money market are in equilibrium. On the other hand, the aggregate supply curve or AS curve shows the quantity of output that firms are willing to supply at each given price level.Thus, the full-employment equilibrium level is when aggregate demand equals the aggregate supply when there is full employment in the economy.An increase in taxes implies that contractionary fiscal policy is imposed. As a result, people are left with less disposable income, and their demand falls. Thus, the aggregate demand in the economy decreases, which further reduces the price level.Therefore, the correct option is (D).Option (A) and Option (B) are incorrect as an increase in tax rate decreases the aggregate demand and does not increase it.Option (C) is incorrect as a change in tax rate also changes the aggregate demand and price level in the economy.In the 3-sector economy equilibrium condition is given byY=A1-c(1-t) , where A=C+I+G+cTR-cT and c=MPCdifferentiating w.r.t. G∆Y∆G=11-c(1-t)=αG (government expenditure mutliplier)now differentiating w.r.t. T⇒∆Y∆T=-c1-c(1-t)⇒∆Y∆T=-c×11-c(1-t)⇒∆Y∆T=-MPC×αG Hence, the correct option is (A). Therefore, the magnitude of the tax multiplier is equal to the MPC times the government expenditure multiplier.

Answered: What is the effect of an increase in…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

What is the effect of an increase in taxes when the economy is above full employment? What is the magnitude of the tax multiplier?

An increase in taxes when the economy is above full employment _______ aggregate demand and real GDP, and the price level _______.

increases; falls

increases; rises

does not change; does not change

decreases; falls

The magnitude of the tax multiplier is equal to _______.

MPC times the government expenditure multiplier

the government expenditure multiplier divided by MPC

MPC

the government expenditure multiplier

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions