EBK ESSENTIALS OF ECONOMICS
7th Edition
ISBN: 8220102452107
Author: Mankiw
Publisher: CENGAGE L
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Question
Chapter 24, Problem 8PA
Subpart (a):
To determine
The initial effect of tax reduction on aggregate
Subpart (b):
To determine
The total effects of tax reduction on aggregate demand.
Subpart (c):
To determine
The comparison of total effects of tax reduction to the total effects of increase in Government purchases.
Subpart (d):
To determine
How can the Government increase aggregate demand without changing the government’s budget deficit.
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The only fill in the blank options are Larger MPC or Smaller MPC
The federal government implements an expansionary fiscal policy of increased spending and decreased taxes. Policy advisors predict output will increase 4% but are surprised when only 3% growth occurs. What might account for the fact that GDP increased by less than the multiplier predicted?
a. Policy advisors' calculation of MPS was too high
b. The aggregate supply curve was perfectly elastic
c. Foreign purchases of domestic goods was greater than expected due to a devalued currency
d. Consumption increases more than expected because of the decrease in taxes
e. Investment decreased due to rising interest rates
Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would
a. always shift aggregate demand right by a smaller amount than the increase in government expenditures.
b. always shift aggregate demand right by a larger amount than the increase in government expenditures.
c. shift aggregate demand right by a larger, equal, or smaller amount than the increase in government expenditures.
d. always shift aggregate demand right by the same amount as the increase in government expenditures.
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