Question

Why is the multiplier for a change in taxes smaller than for a change in spending? a. A change in taxes has no effect on aggregate demand, only on aggregate supply. b. A change in taxes directly affects government spending as well, lowering the multiplier. c. A change in taxes affects spending directly, but at a slower rate than spending does. d. A change in taxes affects disposable income and then consumption rather than spending directly. e. All of the above are correct. If the U.S. reduced government spending and taxes by equal amounts, what would happen to equilibrium GDP? a. It would remain unchanged. b. It would fall. c. It would rise. d. Uncertain, economic theory has no answer to this question. 24. The balancedbudget multiplier suggests that when taxes and government spending are increased by the same amount, there will be: a. no change in the equilibrium level of GDP. b. a decrease in the equilibrium level of GDP. c. an increase in the equilibrium level of GDP. d. first an increase and then a decrease in the equilibrium level of GDP. 25. A constitutional amendment that requires the government to have an annually balanced budget is passed. Should the government desire to increase GDP by $25 billion and meet the provisions of the law it: a. cannot possibly reach its objective without breaking the law. b. should increase spending $25 billion and reduce taxes by $25 billion. c. should increase spending by $25 billion and increase taxes by $25 billion. d. should increase spending by $30 billion and increase taxes by $25 billion.

Answer 1

22) correct choice is option d. Spending multiplier has a greater value then tax multiplier because of the fact that government spending directly increases the aggregate demand by full but tax cut increase the disposable income however the increase consumption only by the MPC times. This implies that taxes do not influence consumption expenditure directly. Hence they have less effect

23) option B is correct. Spending multiplier is greater than tax multiplier which means decline in GDP due to decreased government spending will be more than the increase in GDP due to decreased taxes

24) option C is correct

25) option C is correct.