Question 1

With a proportional income tax,

Accepted Answer

With a proportional income tax, the spending multiplier is adjusted to account for the tax rate, t, and is given by 1/[1 - MPC(1 - t)], where MPC is the marginal propensity to consume.

Question 2

In which of the following situations will the combination of the marginal propensity to consume and the proportional income tax rate (t) result in the largest multiplier?

Accepted Answer

When the MPC is large, it means that a large portion of any additional income will be spent, leading to a larger multiplier effect. When t is small, it means that there is less tax revenue being collected for each additional dollar earned, leaving more money available for consumption and further increasing the multiplier effect. Therefore, the combination of a large MPC and a small t will result in the largest multiplier.

Question 3

When we relax the assumption that net exports do not change with income, the aggregate expenditure function

Accepted Answer

When we relax the assumption that net exports do not change with income, we find that net exports decrease as real domestic income increases. This means that as real domestic income increases, the expenditure on imports increases and the demand for exports decreases. As a result, the aggregate expenditure function becomes flatter, indicating that a greater change in real domestic income is required to bring about a given change in aggregate expenditure.

Question 4

If the MPC is equal to .75 and net taxes, government spending, investment and net exports are all autonomous, then the net tax multiplier is equal to:

Accepted Answer

The answer of If the MPC is equal to .75...

Question 5

With a proportional income tax,

Accepted Answer

With a proportional income tax, each individual pays the same percent of their income in taxes regardless of their income level. This is in contrast to a progressive income tax where higher earners pay a higher percentage of their income in taxes. Option A is describing a system of taxation known as a "ability-to-pay" tax, which is not the same as proportional. Option B is describing a flat tax, which is also different from proportional. Option D and E are not related to the type of tax system being described.

Question 6

In a model with a proportional income tax rate (t), real disposable income equals

Accepted Answer

Real disposable income is equal to real GDP minus taxes paid. In a proportional income tax system, the tax rate is constant, so taxes paid are equal to the tax rate multiplied by real GDP. Therefore, real disposable income equals (1-t) times real GDP. This is option B.

Question 7

The balanced budget multiplier

Accepted Answer

The balanced budget multiplier is equal to 1 because an increase in government spending, matched by an equal increase in taxes, results in a net increase in aggregate demand equal to the initial change in spending.

Question 8

If the government increased autonomous net taxes by $60 million and increased its own purchases by the same amount, we would expect the net effect of these actions to be

Accepted Answer

Increasing government purchases increase aggregate demand, as it increases demand for goods and services in the economy. Increasing net taxes (which is taxes collected by the government minus transfer payments) decreases disposable income and therefore consumption, which would decrease aggregate demand. However, since the question specifies "autonomous" net taxes, which implies that it is not offset by any changes in transfer payments, the increase in government purchases would fully offset the increase in net taxes, resulting in a net increase in aggregate demand and a rightward shift of the aggregate demand curve.

Question 9

If the government wants to increase equilibrium income by $150 billion but does not want to change the size of the deficit, it should

Accepted Answer

Increasing both government spending (G) and taxes (T) by the same amount will increase equilibrium income without changing the deficit, as the initial increase in G directly raises aggregate demand, while the increase in T offsets the deficit impact.

Question 10

If the MPC equals 0.75 and the proportional income tax rate is 0.2, the spending multiplier equals

Accepted Answer

The spending multiplier formula is 1/ (1 - MPC(1 - t)). 
Substituting MPC = 0.75 and t = 0.2, we get: 
Multiplier = 1/ (1- 0.75(1-0.2)) = 1/(1-0.15) = 1/0.85 = 2.5.
Therefore, the correct choice is B.

Question 11

If the MPC = 0.8 and both government purchases and autonomous net taxes fall by $100 billion, by how much does the equilibrium level of real GDP demanded change (assuming neither income taxes nor net exports exist)?

Accepted Answer

The answer of If the MPC = 0.8 and both...

Question 12

The balanced budget multiplier is always negative.

Accepted Answer

The balanced budget multiplier is equal to 1, regardless of the sign of other multipliers. It measures the effect on the economy of a change in government spending or taxes that leaves the budget balance unchanged.

Question 13

Suppose that government purchases increase by $200 and at the same time autonomous net taxes are increased by $200. If there are neither income taxes nor net exports, the change in equilibrium real GDP demanded will

Accepted Answer

The answer of Suppose that government purchases increase by $200...

Question 14

If the MPC is equal to .75 and net taxes, government spending, investment and net exports are all autonomous, then a $1 billion dollar decrease in net taxes will

Accepted Answer

The tax multiplier is calculated as -MPC/(1-MPC). With an MPC of 0.75, the tax multiplier is -0.75/(1-0.75) = -3. Therefore, a $1 billion decrease in net taxes will increase real GDP by $3 billion.

Question 15

The balanced budget multiplier is equal to

Accepted Answer

The balanced budget multiplier is equal to 1 because an equal increase in government spending and taxes leads to an equivalent increase in aggregate demand, assuming the marginal propensity to consume (MPC) is less than 1.

Question 16

A $100 increase in autonomous government purchases has the same effect on the equilibrium level of real GDP as a $100 increase in autonomous investment spending would.

Accepted Answer

Both autonomous government purchases and autonomous investment spending are components of aggregate demand. An increase in either type of spending will shift the AD curve to the right, leading to an increase in equilibrium level of real GDP. The size of the increase may differ due to differences in the spending multiplier, but the initial impact of $100 increase in either type of spending would be the same. Therefore, the statement is true.

Question 17

The effect of a new proportional income tax on the spending multiplier is to

Accepted Answer

The implementation of a new proportional income tax decreases the disposable income available to households, which reduces their ability to spend, hence decreasing the spending multiplier.

Question 18

If the government raised transfer payments by $100 million while reducing its own purchases of computers by $100 million, we would expect the net effect of these actions to be

Accepted Answer

Transfer payments are a component of government spending and reducing government purchases of computers affects the component of investment spending. Both of these actions, increasing transfer payments and reducing government purchases of computers, should shift the aggregate demand curve to the left, decreasing aggregate demand. Therefore, the correct answer is D.

Question 19

If the marginal propensity to consume is 0.8 and the proportional income tax rate is 0.25, by how much would the equilibrium level of real GDP demanded increase if government purchases rose by $50 billion?

Accepted Answer

The multiplier formula is: 
1 / (1 - MPC x (1 - proportional tax rate))
= 1 / (1 - 0.8 x 0.75)
= 1 / 0.35
= 2.86

Therefore, an increase in government purchases by $50 billion will result in an increase in real GDP demanded by:
$50 billion x 2.86 = $143 billion
However, we need to adjust this by the proportional tax rate: 
$143 billion x (1 - 0.25) = $107 billion

Therefore, the equilibrium level of real GDP demanded would increase by $107 billion. The closest answer choice is D) $125 billion.

Question 20

An increase in autonomous government purchases will have exactly the same effect as an equal increase in

Accepted Answer

Autonomous government purchases and autonomous investment are both components of aggregate expenditures in the Keynesian model. An increase in either of these components will shift the aggregate expenditures line upward by the same amount, increasing equilibrium output and price level. The other options listed (autonomous net taxes, proportional income taxes, autonomous saving, transfer payments) affect households' disposable income and saving decisions, but do not directly affect aggregate expenditures.

Quiz 26: The Algebra of Demand-Side Equilibrium

With a proportional income tax,

In which of the following situations will the combination of the marginal propensity to consume and the proportional income tax rate (t) result in the largest multiplier?

When we relax the assumption that net exports do not change with income, the aggregate expenditure function

If the MPC is equal to .75 and net taxes, government spending, investment and net exports are all autonomous, then the net tax multiplier is equal to:

With a proportional income tax,

In a model with a proportional income tax rate (t) , real disposable income equals

The balanced budget multiplier

If the government increased autonomous net taxes by $60 million and increased its own purchases by the same amount, we would expect the net effect of these actions to be

If the government wants to increase equilibrium income by $150 billion but does not want to change the size of the deficit, it should

If the MPC equals 0.75 and the proportional income tax rate is 0.2, the spending multiplier equals

If the MPC = 0.8 and both government purchases and autonomous net taxes fall by $100 billion, by how much does the equilibrium level of real GDP demanded change (assuming neither income taxes nor net exports exist) ?

The balanced budget multiplier is always negative.

Suppose that government purchases increase by $200 and at the same time autonomous net taxes are increased by $200. If there are neither income taxes nor net exports, the change in equilibrium real GDP demanded will

If the MPC is equal to .75 and net taxes, government spending, investment and net exports are all autonomous, then a $1 billion dollar decrease in net taxes will

The balanced budget multiplier is equal to

A $100 increase in autonomous government purchases has the same effect on the equilibrium level of real GDP as a $100 increase in autonomous investment spending would.

The effect of a new proportional income tax on the spending multiplier is to

If the government raised transfer payments by $100 million while reducing its own purchases of computers by $100 million, we would expect the net effect of these actions to be

If the marginal propensity to consume is 0.8 and the proportional income tax rate is 0.25, by how much would the equilibrium level of real GDP demanded increase if government purchases rose by $50 billion?

An increase in autonomous government purchases will have exactly the same effect as an equal increase in