Consider an economy in which government raises revenue with an income tax. In class we look at two options: a lump sum tax equal to a fixed amount (that we called TA) or imposing a tax rate t proportional to income. I. the proportional tax will exacerbate the effect of a shock to consumer confidence on output. II. the proportional tax will result in a smaller level of aggregate output. O I and II are both true I is true but not II O I and II are both false Il is true but not I

Consider an economy in which government raises revenue with an income tax. In class we look at two options: a lump sum tax equal to a fixed amount (that we called TA) or imposing a tax rate t proportional to income. I. the proportional tax will exacerbate the effect of a shock to consumer confidence on output. II. the proportional tax will result in a smaller level of aggregate output. O I and II are both true I is true but not II O I and II are both false Il is true but not I

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 5DQ

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Fiscal policy consists of the executive branch's decisions to tax and spend. If the economy is in an expansionary mode just coming out of a recession, in regards to aggregate demand and aggregate supply, we can assume that a tax hike will lead to a. aggregate supply to shift inward. b. the economy expanding even more as a result. c. aggregate demand to shift inward. d. no changes will occur. e. aggregate demand and supply to shift inward.
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
Right now many economies in the world are experiencing a downturn due to the Corona Virus.a) What kind of fiscal policy can governments use to address the decline? b) What actions will be taken by the government in implementing the fiscal policy that you described in part a? c) What will be the effect on Aggregate Demand (if any) as a result of the actions taken in part b?d) What will be the effect on Aggregate Supply (if any) as a result of the actions taken in part b?
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