ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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decreases by $5 million.
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increases by $5 million.
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increases by $5 times the tax multiplier.
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decreases by $5 million times the government expenditure multiplier.
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increases by $5 million times the government expenditure multiplier.
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Detailed explanation-1: -Decreasing government spending tends to slow economic activity as the government purchases fewer goods and services from the private sector. Increasing tax revenue tends to slow economic activity by decreasing individuals’ disposable income, likely causing them to decrease spending on goods and services.
Detailed explanation-2: -We can use the algebra of the spending multiplier to determine how much government spending should be increased to return the economy to potential GDP where full employment occurs. Aggregate Expenditure = C + I + G + (X – M).
Detailed explanation-3: -First, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, households’ disposable income rises, and they will spend more on consumption. This rise in consumption will in turn raise aggregate demand.
Detailed explanation-4: -The multiplier effect refers to the theory that government spending intended to stimulate the economy causes increases in private spending that additionally stimulates the economy. In essence, the theory is that government spending gives households additional income, which leads to increased consumer spending.