Ignoring any supply-side effects, how does the magnitude of the government expenditure multiplier compare to the magnitude of the tax multiplier? Explain your answer
What will be an ideal response?
The magnitude of the government expenditure multiplier is larger than the magnitude of the tax multiplier. The government expenditure multiplier is larger because a $1 change in government expenditures has an initial effect on aggregate demand of $1. In other words, a $1 increase in government expenditures initially increases aggregate demand by the entire $1. However, a $1 change in taxes does not initially affect aggregate demand by the entire $1. Instead, it affects aggregate demand by less than $1. For instance, a $1 decrease in taxes increases aggregate demand by less than $1. Why? Because part of the $1 decrease in taxes is saved and the amount saved does not increase aggregate demand.
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If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to year 2 is
A) 20%. B) 10%. C) 11%. D) 120%.
In a perfectly competitive industry, which of the following is true?
a. The competitive price is higher and quantity higher than the socially efficient point. b. The competitive price is higher and quantity lower than the socially efficient point. c. Since the industry is perfectly competitive, price and quantity are at the socially efficient levels. d. The competitive price is lower and quantity higher than the socially efficient point.