Question

Each question has 8-9 parts, depending on the work. Please answer every part. Thank you.

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The government spending multiplier is

Group of answer choices

the ratio of the change in the equilibrium level of output to a change in government spending

the difference between the new and old levels of government spending.

the ratio of the change in government spending to the change in the equilibrium level of output

the difference between the old level of equilibrium output and the new equilibrium level of output.

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The formula for the GOVERNMENT spending multiplier is

Group of answer choices

1 / (1 + MPS)

1 / MPS

1 / (1 + MPC)

1 / MPC

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The formula for the TAX multiplier is

Group of answer choices

- 1 / (1 + MPS)

(- MPC / (1 - MPC))

1 / (1- MPS)

(- MPS / (1 - MPC))

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If the government spending multiplier is 5, then the TAX multiplier is …

Group of answer choices

- 4

+ 1

can not be determined.

- 5

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If government spending is increased by $700 and taxes are increased by $700, then the equilibrium level of income will …

Group of answer choices

not change.

increase by $1,400.

increase by $700.

decrease by $700.

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As the size of the Marginal Propenity to Consume increases, the value of the government spending multiplier…

Group of answer choices

remains constant.

decreases.

increases.

could increase or decrease.

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In terms of the Leakages-Injections approach to GDP, exports (X) are considered to be a(n) ------------------ and imports (M) are considered to be a(n) ------------------- .

Group of answer choices

leakage ; injection

injection ; leakage

injection ; injection

leakage ; leakage

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If a nation is experiencing an INFLATIONARY gap, then…

Group of answer choices

the actual level of unemployment is greater than the natural rate of unemployment.

the levels of inventories are accumulating.

the equilibrium level of output is less than the actual level of output.

the equilibrium level of output is equal to the actual level of output.

Answer 1

Answer.

1. Government spending multiplier measures the change in income/output that occur due to the change in government spending. Thus, the correct option answer is A. The ratio of the change in the equilibrium level of output to a change in government spending.

2. Government spending multiplier is based on the marginal propensity to consume. It means the change in consumption that happens due to the change in income. Thus,

Government spending multiplier = 1/1-MPC = 1/MPS.

As, MPC+MPS =1.

3. Tax multiplier is the ratio of change in equilibrium level of output due to the change in taxes. It depends upon MPC and can be computed as;

Tax multiplier = - MPC/ 1-MPC.

4. Given, Government spending multiplier is 5.

Using the formula,

5 = 1/MPS

So, MPS = 1/5 = 0.2

So, MPC = 0.8.

Tax Multiplier = -0.8 / 1- 0.8 = 4. Option A is correct.

5. If government spending and taxes increase by same proportion, there is no change in equilibrium level of output. So, option A is correct.

6. Government spending multiplier and MPC are positively related. So, if MPC increases, Government spending multiplier also increases.

7. In terms of the Leakages-Injections approach to GDP, exports (X) are considered to be an injections and imports (M) are considered to be leakages. This is because exports results into inflow of money into the economy and imports results into withdrawal of money from the system.

8. If a nation is experiencing an INFLATIONARY gap, then actual output in the economy is greater than potential full-employment level of GDP. In other words, when the equilibrium level of output is less than the actual level of output.

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