Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781337091985
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 16, Problem 4PA
To determine
Impact of tax cut.
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Consider two policies-a tax cut that will last for only one year, and a tax cut that is expected to be permanent. which policy will stimulate greater spending by consumers? which is policy will have the greater impact on aggregate demand? explain
Examine the following policies and determine which would decrease the level of aggregate demand.
Decreasing in government spending and decreasing taxes
Increasing investment and increasing government spending
Increasing consumption and decreasing taxes
Decreasing in government spending and increasing in taxes
In an effort to increase output in the short run due to the poor economy, government officials have decided to cut taxes. They are considering two possible temporary tax cuts of equal size in terms of lost revenue. The first would reduce the taxes on people with incomes above $100,000 per year. The second would cut taxes on people with incomes below $60,000 for one year. Which change would have a greater impact on aggregate spending (i.e shift the aggregate demand curve further to the right)? Why?
Chapter 16 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
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- The Australian government is concerned about the growing budget deficit, so they decide to cut government expenditures by $15 billion. They also decide the economy needs a boost so they decide to cut income taxes by $40 billion. Would this simply mean a net increase in aggregate demand of $25 billion? Why or why not?arrow_forwardsupply-side economists believe that a reduction in the tax rate a. always decrease government tax revenue b. shifts the aggregate supply curve to the right c. would decrease consumption d. provides no incentive for people to work more d. provides no incentive for people to work morearrow_forwardConsider two policies: a tax cut that will last for only one year and a tax cut that is expected to be permanent. True or False: A tax cut that is expected to be permanent will have a greater impact on aggregate demand than a tax cut that will last for only one year. True Falsearrow_forward
- Explain with example how a reduction in taxes without a reduction in government spending may have no impact on aggregate demand.arrow_forwardWhich of the following will cause a decrease in aggregate demand? A) Increase in government spending B) Decrease in discount rate C) Increase in taxes D) the FED buying government securities from the publicarrow_forwardAn economist who claims that an increase in government spending would result mainly in a higher price level believes the economy is operating where the Group of answer choices aggregate supply curve is steep. MPC is small. aggregate supply curve is flat. MPC is large.arrow_forward
- If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion by: reducing government expenditures by $125 billion. reducing government expenditures by $20 billion. increasing taxes by $50 billion. increasing taxes by $250 billion.arrow_forwardSuppose the government increases spending to fund tuition assistance for qualified college students. Automatic stabilizers will _____ the _____ effect of the _____ in aggregate demand. a. increase; contractionary; decrease b. decrease; contractionary; increase c. increase; expansionary; increase d. decrease; expansionary; increasearrow_forwardAssume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. Instructions: In part a, round your answers to 2 decimal places. Enter your answers as positive numbers. In part b, enter your answers as whole numbers. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $40 billion?arrow_forward
- With the economy in a recession due to inadequate aggregate demand, the government increased its spending by $1,200. Suppose the central bank takes no action for the time being, and the marginal propensity to consume is 2/3, how large will the increase of aggregate demand approximately?arrow_forwardSuppose that the U.S. government increases its expenditure on highways and bridges by $100 billion. Explain the effect that this expenditure would have on aggregate demand and real GDP.arrow_forwardUse the following graph to answer the next question. In the diagram, Qf is the full-employment output. If the economy's current aggregate demand curve is AD1, it would be appropriate for the government to ___. reduce government purchases and taxes by equal-size amounts. reduce government purchases or increase taxes. increase government purchases or reduce taxes. reduce unemployment compensation benefits.arrow_forward
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