How can we explain the effect of a proportional tax on the multiplier?
What will be an ideal response?
Taxes that rise
with income will tend to lower the proportion consumed out of each dollar increase in income. For example, with a 15 percent tax each extra dollar of income will be reduced to 85 cents of disposable income. Applying our original mpc of 0.80 to the remaining 85 cents, we get 0.8 3 0.85 = 0.68, indicating that 68 cents will be devoted to consumption
(and 17 cents to saving). The result is similar to having a lower mpc, which also means a lower multiplier. This will dampen the effect of income changes on aggregate demand and economic equilibrium.
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In the above figure, the indifference curves indicate that the two goods are
A) perfect complements. B) perfect substitutes. C) ordinary goods. D) normal goods.
An expansionary monetary policy is likely to increase real output more than just temporarily:
a. when actual output currently is beyond the economy's long-run capacity. b. when the economy currently is at full employment c. when the economy currently operates at less than capacity. d. at virtually any output level.