Why is the tax multiplier smaller (in absolute value) than the autonomous spending multiplier?
What will be an ideal response?
An increase in taxes first reduces household income by the amount of the tax. Because the MPC is always less than one, the decrease in consumer spending resulting from the increase in taxes is less than the actual increase in taxes.
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According to the Ricardian model, the source of comparative advantage is:
a. differences in labor productivity in different countries. b. differences in foreign trade policies followed by the government of various countries. c. differences in resource endowments of an economy. d. differences in the fields of research and development in a country. e. differences in the taste and preferences of the consumers in different countries.
Starting from long-run equilibrium, a large tax cut will result in a(n) ________ gap in the short-run and ________ inflation and ________ output in the long-run.
A. expansionary; higher; higher B. expansionary; higher; potential C. recessionary; higher; potential D. recessionary; lower; lower