Topic: Fiscal Policy 1. A government collects $0.35 on every new dollar of income. Of the remaining $0.65 of disposable income, 20% is spent on imports, and 10% of the disposable income is saved. a. What is the marginal propensity to withdraw? b. How much of each new dollar of income is spent on domestic consumption? c. What is the spending multiplier in this economy?

Topic: Fiscal Policy 1. A government collects $0.35 on every new dollar of income. Of the remaining $0.65 of disposable income, 20% is spent on imports, and 10% of the disposable income is saved. a. What is the marginal propensity to withdraw? b. How much of each new dollar of income is spent on domestic consumption? c. What is the spending multiplier in this economy?

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.5P: Explain the difference between the government purchases multiplier and the net tax multiplier. If...

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1. (Fiscal Policy) Define fiscal policy. Determine whether each of the following, other factors held constant, would, in the short run, lead to an increase, a decrease, or no change in the level of real GDP demanded: a. A decrease in government purchases b. An increase in net taxes c. A reduction in transfer payments d. A decrease in the marginal propensity to consume 2. (Fiscal Multipliers) Explain the difference between the government purchases multiplier and the net tax multiplier. If the MPC falls, what happens to the tax multiplier? 3. (Multipliers) Suppose investment, in addition to having an autonomous component, also has a component that varies directly with the level of real GDP. How would this affect the size of the spending multiplier? 4. (Fiscal Policy) Chapter 11 shows that increased government purchases, with taxes held constant, can eliminate a recessionary gap. How could a tax cut achieve the same result? 5. (Evolution of Fiscal Policy) What did classical economists…