Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 34, Problem 8PA
Subpart (a):
To determine
The initial effect of tax reduction on aggregate demand.
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
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; falls
The 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 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
Chapter 34 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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