Governments impose excise taxes on goods that have inelastic demand, such as cigarettes, more often than in other cases. Why?
What will be an ideal response?
Imposing an excise tax reduces the supply of the good, reducing equilibrium quantity and raising the price. If demand is elastic, taxes will tend to reduce quantity by a significant amount, and thus government tax revenues will be relatively small. However, if demand is inelastic, the reduction in quantity will be small, and government tax revenues will be higher. (Governments may also impose taxes to deter consumption, but this is likely to be ineffective if elasticity is low.)
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Suppose that you are the president of a small printing company and you are considering the purchase of new machinery. What factors must you consider in making this decision?
What will be an ideal response?
The fiscal-policy multiplier will be greater
A) the greater is the interest responsiveness of the demand for money. B) the smaller is the interest responsiveness of autonomous expenditures. C) the smaller is the income responsiveness of the demand for money. D) All of the above tend to make the fiscal-policy multiplier greater.