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Chapter 13: Types of Fiscal Policy (page 264)

What is the relationship between the multiplier and the AD component of government spending?

Short Answer

Expert verified

Every component has its own respective multiplier.

Step by step solution

01

Types of fiscal policy

  • The larger the government spending multiplier, the smaller the increase in government spending is needed to achieve the desired increase in national income. The same principle applies to the other components of aggregate demand.

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Most popular questions from this chapter

Assume that a hypothetical economy with an MPC of .8 is experiencing a severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Determine one possible combination of government spending increases and tax decreases that would accomplish the same goal.

During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about \(2.6 trillion down to about \)2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?

  1. Yes

  2. No

Some politicians have suggested that the United States enact a constitutional amendment requiring that the federal government balance its budget annually. Explain why such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experiences a severe recession.

Refer to the following table for Waxwania:

What is the marginal tax rate in Waxwania? The average tax rate? Which of the following describes the tax system: proportional, progressive, or regressive?

Which of the following would help a government reduce an inflationary output gap?

  1. Raising taxes

  2. Lowering taxes

  3. Increasing government spending

  4. Decreasing government spending
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