Please type all the answers in short, thank you. 6) Describe the differences (in
ID: 1160434 • Letter: P
Question
Please type all the answers in short, thank you.
6) Describe the differences (in sign and relative magnitude) between the governmert purchases multiplier and the tax multiplier. 7) What economic impact would the closing of a nearby military base have on a town? Would people and businesses that did not directly deal with the military personnel be affected? 8) Explain why the tax multiplier is different from the government purchases multiplier, in both sign and relative magnitude. 9) Suppose that the current equilibrium GDP is $14.5 trillion and that potential GDP is $14.3 trillion. Will decreasing government purchases by $200 billion, or raising taxes by $200 billion, restore the economy to potential GDP? Explain.Explanation / Answer
6.The tax multiplier is smaller than the government spending multiplier.This is because entire government spending increases AD but only a portion of the increased disposable income due to increased taxes,is consumed.
7.If a military base is closes then the aggregate demand falls because the population decreases.Also,due to military base,number of developments are undertaken in a town.These developments induces investment even for businesses not directly related to military.Overall,AD in this town would fall.
8.Government spending multiplier=1/1-b
Where b is MPC.The greater the value of b,the larger the multiplier.It is always positive.
Tax multiplier=-b/(1-b)
1-b=MPS
Tax multiplier =-MPC/MPS
It is negative and smaller than government spending multiplier.
9.Not necessarily.If government spending increases has multiplier effect, so does a decrease in spending.GDP falls by more than 200 billions.