How does the household savings rate affect the impact on output of an increase in government...
How does the household savings rate affect the impact on output of an increase in government spending?
- If the rate of savings is low, the effect of the increase will be greater than it otherwise would have been.
- If the rate of savings is high, the effect of the increase will be greater than it otherwise would have been.
- If the increase in government spending is high, the effect will be large.
- It has no effect.
An increase in taxes reduces aggregate expenditures by an amount equal to
- the change in taxes multiplied by −b.
- the change in taxes multiplied by (−b/1 − b).
- the change in taxes multiplied by (1/1 − b).
- the change in taxes.
(The answers to both of these are not B, I believe)
Homework Answers
Answer 1) when the savings rate is low then marginal propensity to consume(MPC) is more which means the of multiplier (1/(1- MPC)) is greater than otherwise. So as the there is increase in government expenditure which leads to increase in output by more than the case when savings rate is not low.
So, option A) is correct.
Answer 2) An increase in the taxes reduces aggregate expenditure as there is inverse relationship between taxes and aggregate expenditure. The amount by which the change is there is equal to the change in taxes multplied by (-b/(1-b)) which is tax multiplier and where b is marginal propensity to consume.
So, option B) is correct.
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