All Flashcards
If MPC is 0.8, what does this imply about consumer behavior?
For every extra dollar of income, consumers will spend 0.80 and save 0.20.
How does an increase in government spending affect GDP through the multiplier effect?
The initial spending creates new income, which is then spent by others, creating more income, leading to a larger overall increase in GDP.
If the government cuts taxes, how does the tax multiplier impact aggregate demand?
A tax cut increases disposable income, leading to increased consumption and a multiplied effect on aggregate demand, though smaller than the spending multiplier.
How does an increase in imports affect the spending multiplier and overall real GDP?
An increase in imports decreases the overall real GDP.
How does an increase in exports affect the spending multiplier and overall real GDP?
An increase in exports increases the overall real GDP.
Explain the relationship between MPC and the size of the spending multiplier.
A higher MPC leads to a larger spending multiplier because more of each additional dollar is spent, creating a larger ripple effect through the economy.
Why is the tax multiplier smaller than the spending multiplier?
Because a portion of a tax cut is saved rather than spent, reducing the initial impact on aggregate demand compared to an equivalent increase in government spending.
If the MPS increases, what happens to the spending multiplier?
The spending multiplier decreases because a larger portion of each additional dollar is saved, reducing the subsequent rounds of spending.
What are the differences between the spending multiplier and the tax multiplier?
The spending multiplier is positive and generally larger, while the tax multiplier is negative and smaller. The spending multiplier reflects a direct increase in spending, while the tax multiplier reflects a change in disposable income.
Compare and contrast MPC and MPS.
MPC is the proportion of an additional dollar of income that is spent, while MPS is the proportion that is saved. They are inversely related and always sum to 1.
Differentiate between the impact of an increase in government spending and an increase in exports on real GDP.
Both increase real GDP through the multiplier effect, but government spending is a domestic policy tool, while exports depend on foreign demand.
Compare the effects of a tax increase versus a decrease in government spending on aggregate demand.
Both decrease aggregate demand, but a tax increase reduces disposable income, while a decrease in government spending directly reduces government expenditure.
What is the impact of increased government spending on aggregate demand?
Increased government spending directly increases aggregate demand, and the multiplier effect further amplifies this increase.
How does a decrease in taxes affect consumer spending and aggregate demand?
A decrease in taxes increases disposable income, leading to higher consumer spending and an increase in aggregate demand.
In a recession, which policy (increased spending or tax cuts) has a potentially larger impact, and why?
Increased government spending generally has a larger impact due to the spending multiplier being larger than the tax multiplier.
What are the potential drawbacks of using fiscal policy (spending or tax changes) to influence the economy?
Potential drawbacks include time lags, difficulty in accurately predicting the multiplier effect, and the possibility of crowding out private investment.
How does the size of the MPC affect the effectiveness of a tax cut as a stimulus measure?
A larger MPC makes a tax cut more effective because a greater portion of the tax cut will be spent, leading to a larger multiplier effect.
How might an increase in government spending affect national debt levels?
Increased government spending, especially if not offset by increased tax revenue, can lead to higher national debt levels.
What is the impact of a lump-sum tax cut on aggregate demand, compared to a tax cut targeted at low-income households?
A tax cut targeted at low-income households may have a larger impact on aggregate demand because low-income households typically have a higher MPC.