n due to the poor economy, government officials have decided to cut taxes. They are considering two possible temporary tax cuts of equal size in terms of lost revenue. The first would reduce the taxes on people with incomes abov
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In an effort to increase output in the short run due to the poor economy, government officials have decided to cut taxes. They are considering two possible temporary tax cuts of equal size in terms of lost revenue. The first would reduce the taxes on people with incomes above $100,000 per year. The second would cut taxes on people with incomes below $60,000 for one year. Which change would have a greater impact on aggregate spending (i.e shift the aggregate demand curve further to the right)? Why?
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- Changes in taxes The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax cut has on the economy. Suppose the governments of two very similar economies, economy B and economy A, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy B is 0.7 and the MPC in economy A is 0.85. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the (SMALLER MPC or LARGER MPC).The following graph shows the aggregate demand curve. Shift the aggregate demand curve on the graph to show the impact of a tax hike. 130 120 Aggregate Demand 110 100 90 Aggregate Demand 80 70 10 20 30 40 50 60 OUTPUT Suppose the governments of two different economies, economy J and economy K, implement a permanent tax cut of the same size. The marginal propensity to consume (MPC) in economy J is 0.85 and the MPC in economy K is 0.8. The economies are identical in all other respects. The tax cut will have a larger impact on aggregate demand in the economy with the PRICE LEVELThe following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax cut has on the economy. (?) PRICE LEVEL 130 120 110 100 90 80 70 0 10 20 30 OUTPUT Aggregate Demand 40 50 60 Aggregate Demand Suppose the governments of two very similar economies, economy B and economy A, implement a permanent tax cut of equal size. Investment spending in economy B is less sensitive to changes in the interest rate than investment spending in economy A. The economies are otherwise completely identical.
- Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional doilar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is , and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $400 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to This decreases income yet again, leading to a second change in consumption equal to The total change in demand resulting from the initial change in government spending isFiscal policy consists of intentional changes in the government's spending levels or tax policies designed to achieve specific macroeconomic goals such as full employment, price stability, or economic growth. By influencing the amount of total spending in the economy, the government can influence the position of the aggregate demand curve. Our theory tells us that aggregate demand will shift by a multiple of the change in spending or taxes. However, spending and tax changes have slightly different effects, as changes in taxes affect spending only indirectly by changing the amount of disposable income. An expansionary fiscal policy may be implemented to fight a recession, while a contractionary policy may be appropriate to control demand-pull inflation. Exploration: How do changes in government spending and taxes affect the equilibrium price level and real GDP? Discuss in detail use your economics textbook.Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. PRICE LEVEL 130 20 120 110 100 90 80 Aggregate Demand 70 + + 0 10 20 30 OUTPUT 40 50 60 Aggregate Demand ? Suppose the governments of two very similar economies, economy Y and economy Z, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy Y is 0.85 and the MPC in economy Z is 0.8. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the
- Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. Please answer the following questions with calculation details. (1) If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? (2) If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right? (3) Are the above two results the same? Why or why not? MadhaviExplain why increased government spending of, for example, $15 billion, will have a different impact on aggregate demand than a $15 billion tax cut.Suppose economists observe that an increase in government spending of $14 billion raises the total demand for goods and services by $42 billion. If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be . Now suppose the economists allow for crowding out. Their new estimate of the MPC would be than their initial one.
- Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.75 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is The following graph shows the initial aggregate demand (AD) and short-run aggregate supply (SRAS) curves of this economy. Suppose that the economy is currently in a recession. Business firms are pessimistic about the future and do not respond to a fall in interest rates. In addition, all households are pessimistic about job prospects and desire to consume less and save more at all levels of income. As a result, personal consumption in this economy decreases by $1 billion. The reduction in personal consumption will lead to a decrease in aggregate demand by S Shift either the AD curve or the SRAS curve, or both, to show the new aggregate demand curve after the full impact of the multiplier process of the reduction in personal consumption has taken place. PRICE LEVEL (Billions of…2. Fiscal policy Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should be used. Economist A believes that the government spending multiplier is 8 and the tax multiplier is 2. Economist B believes that the government spending multiplier is 4 and the tax multiplier is 8. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect. Policy Options for Closing Output Gap Increase in Spending Tax Cut Spending Multiplier Tax Multiplier (Billions of dollars) (Billions of dollars) Economist A Economist B 4 8Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases income yet again, causing a second change in consumption equal to The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD₁ ) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD2) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by selecting it…