Homework Sourse5Let c08 Then in our simple model of aggregate demand a doll
5)Let c=0.8. Then in our simple model of aggregate demand a dollar increase in taxes causes.
a)A 5 dollar increase in the equilibrium output.
b)A 5 dollar decrease in the equilibrium output.
c)A 4 dollar increase in the equilibrium output.
d)A 4 dollar decrease in the equilibrium output.
6)Let c=0.8. Then in our simple model of aggregate demand a dollar decrease in government expenditures causes
a)A 5 dollars increase in the equilibrium output.
b)A 5 dollar decrease in the equilibrium output.
c)A 4 dollar increase in the equilibrium output.
d)A 4 dollar decrease in the equilibrium output.
7)Which of the following is true?
a)The multipliers of the government expenditures and taxes are easily calculated by the government.
b)Fiscal policy is usually not successful because the government cannot control most economic variables.
c)Fiscal policy cannot fix the economy overnight because tax and spending policies affect aggregate demand after some time.
d)Consumer spending immediately reacts to income tax cuts.
e)Both b and c.
8)In 2009-2010 fiscal policy debates
a)Republicans voted against the stimulus package because they believed that the economy can rely on its self-correcting mechanism.
b)Democrats offered to reduce taxes as a part of the stimulus package.
c)Republicans liked the stimulus package and the majority of them voted for it.
9)Which of the following is true?
a)A recessionary gap cannot be closed completely because of sticky wages.
b)Empirical studies show that a recessionary gap can be closed automatically and quickly.
c)Wages decrease dramatically in the time of recession for reasons such as minimum wages, union contacts, and government restrictions.
d)Firms do not tend to reduce wages by much during a recession because they are afraid of losing their best workers.
e)Both a and d.
Solution
5. If MPC= 0.8, then tax multiplier = -0.8/(1-0.8) = - 0.8 / 0.2 = - 4
that is, a dollar increase in taxes causes a 4 dollar decline in output.
Answer- Option D
Expenditure Multiplier = 1 / 1-MPC = 1 / (1-0.8) = 1/0.2 = 5
A dollar increase in expenditure causes $5 increase in output.
Answer - Option A
