ECONOMICS
AGGREGATE DEMAND
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
The marginal rate of tax on extra income is low
|
|
|
Businesses in economy cannot expand production in short run
|
|
|
propensity to spend extra income is low
|
|
|
consumer confidence is low
|
Detailed explanation-1: -If they spend only 10% of extra income the multiplier effect will be low. A cut in income tax means that people keep a high % of their gross income. Therefore the multiplier effect will be higher. A cut in income tax is a withdrawal – leading to less spending and therefore it reduces the size of the multiplier.
Detailed explanation-2: -That the national product has increased means that the national income has increased. Consequently consumption demand increases, and firms then produce to meet this demand. Thus the national income and product rises by more than the increase in investment. The multiplier effect is greater than one.
Detailed explanation-3: -How Is the Multiplier Effect Related to MPC? The magnitude of the multiplier is directly related to the marginal propensity to consume (MPC), which is defined as the proportion of an increase in income that gets spent on consumption.
Detailed explanation-4: -WHY?-The higher the tax rate, the smaller the amount of any increase in income that households have available to spend, which in turn reduces the size of the multiplier effect.
Detailed explanation-5: -Would the multiplier be larger or smaller if you saved more of your additional income? Smaller b/c MPC would be smaller. What would happen if all saved all of the change in their incomes? There would be no multiplier (it would be 1).