Learning Materials
Features
Discover
Chapter 13: Types of fiscal policy (page 264)
What happens between the public and private sectors during a "crowding out" effect?
The public sector displaces the private sector
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
What are the government’s fiscal policy options for ending severe demand-pull inflation?
(For students who were assigned Chapter 11) Assume that, without taxes, the consumption schedule for an economy is as shown below:
| GDP, Billions | Consumption, Billions |
| \(100 | 120 |
| 200 | 200 |
| 300 | 280 |
| 400 | 360 |
| 500 | 440 |
| 600 | 520 |
| 700 | 600 |
Graph this consumption schedule. What is the size of the MPC?
Assume that a lump-sum (regressive) tax of \)10 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.
Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule, and calculate the MPC and the multiplier.
Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is \(100, 5 percent at \)200, 10 percent at \(300, 15 percent at \)400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and the multiplier.
Use a graph similar to Figure 13.3 to show why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not.
What happens to the taxation and government spending rates during an expansionary fiscal policy?
Trace the cause-and-effect chain through which financing and refinancing of the public debt might affect real interest rates, private investment, the capital stock, and economic growth. How might investment in public capital and public-private complementarities alter the outcome of the cause-effect chain?
Which of the following would help a government reduce an inflationary output gap?
Raising taxes
Lowering taxes
Increasing government spending
Decreasing government spending
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Exams 
GCSE 
IGCSE 
AS 
A Level 
International A Level 
University Admissions Tests 
Flashcards 
Vaia AI 
Notes 
Study Plans 
Study Sets 
Find a job 
Find a degree 
Student Deals 
Magazine 
Mobile App