Based on our understanding of the model presented in Ch3, a 5% tax cut in a country with balanced budget will cause an increase in equilibrium output? TRUE OR FALSE
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- Explain how automatic stabilizers work, both on the taxation side and on the spending side, first in a situation where the economy is producing less than potential GDP and then in a situation where the economy Is producing more than potential GDP.What is the main advantage of automatic stabilizers over discretionary fiscal policy?What would happen if expansionary fiscal policy was implemented in a recession but, due to lag, did not actually take effect until after the economy was back to potential GDP?
- Explain the difference between the government purchases multiplier and the net tax multiplier. If the MPC falls, what happens to the tax multiplier?A4 Consider a linear income tax system in which one’s tax owed to government, T, depends on one’s income, I, according to the formula T = a + tI, where 0 < t < 1, and a is a constant. (a) What is the marginal tax rate (MTR)? Does the MTR change with income? (b) What is the average tax rate (ATR) when the income level is I? (c) If the income tax is progressive, then what can you say about the value of a?The necessary condition for a budget to be considered fiscally sustainable is that:(a) it is balanced annually.(b) it does not cause the crowding out effect.(c) the current generation of voters accepts the burden of their current level of taxation.(d) the present value of expected future government revenue is equal to the present value of expected government spending.
- If the government were to try to offset surplus years with deficit years over the business cycle, this would result in O A. a reduction in investment capital. O B. a higher debt-to-GDP ratio. OC. an annually balanced budget. O D. a structurally balanced budget. O E. a cyclically balanced budget.Suppose the government uses a balanced-budget policy, Önancing its expenditure bylump-sum taxes (i.e., G = T) Suppose the government wants to achieve the same output level as in the no-taxcase in 1 (b) above. (output level = 3800)i. Does it have to increase or decrease its expenditure (G) and taxes (T) with G = T , and by how much?ii. What is the value of the balanced-budget multiplier?iii. In the no-tax case in 1 (b); the G-policy can eliminate any trade imbalance(i.e., make NX = 0). Would the government be able to achieve exact tradebalance as well under the balanced-budget policy here? If not, would therebe a trade surplus or trade deficit, and how big is the surplus/deficit5 Suppose the government implements an expansionary fiscal policy to finance e-toll gantries. Required ∆Y = R1 000, the marginal propensity to consume is 50% and the proportional tax rate is 40%. How much will government expenditure have to change to reach the required change in equilibrium income? a. R699 b. R800 c. R1 000 d. R1 200
- Suppose the federal government gives taxpayers a tax cut financed by borrowing. If taxpayers their debts, total spending will: O decrease. O first increase and then decrease. O increase. O remain unchanged.Suppose the economy is operating at equilibrium, with Y0 5 1,000. If the government undertakes a fiscal change whereby the tax rate, t , increases by .05 and government spending increases by 50, will the budget surplus go up or down? Why?Assume that the consumption function is given by C = 150 + 0.85(Y – T), the tax function is given by T = t0 + t1Y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by: a) 500 b) 525 c) 85 d) 425
