ECON 104 Lecture Notes - Lecture 13: Procyclical And Countercyclical, Fiscal Multiplier, Fiscal Policy

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19 Sep 2016

School

George Mason University

Department

Economics

Course

ECON 104

Professor

Rustici/ Gillespie

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Document Summary

Multiplier effect: increase in g will be magnified because it has expansionary effects on c and i a) as well. b) Crowding out: increase in g will increase the deficit. An additional dollar of g is income to whoever gets it, who spends part of it, which makes that (1) part income to someone else, and so on. Whatever isn"t spent in each round is saved. The marginal propensity to consume (mpc) is the amount of an additional dollar of income that (2) a person will spend on consumption. Example: say a typical person will spend 80 cents of an additional dollar of income. 8 and the multiplier is 5. b) c) In this case, the multiplier effect of b of increased g is 5 x 80b = b. The multiplier also applies to autonomous increases in: Increase in g increases md, which raises r, which lowers i. This counteracts the multiplier effect to some extent.

Related Questions

Calculate the government-taxation multiplier for each marginal propensity to consume. Instructions: Round your answers to two decimal places.

a. The marginal propensity to consume (MPC) = 0.2, and the government spending multiplier is 1.25. The taxation multiplier is ?.

b. The marginal propensity to consume (MPC) = 0.5, and the government spending multiplier is 2.00. The taxation multiplier is ?.

c. The marginal propensity to consume (MPC) = 0.8, and the government spending multiplier is 5.00. The taxation multiplier is ?.

d. What do your results imply about the relative strength of changes in government spending versus changes in taxation for fiscal policy, all else equal?

i. Changes in government spending will have an indeterminate effect on GDP and income compared to changes in taxes.

ii. Changes in government spending will have a bigger effect on GDP and income than will changes in taxes.

iii. Changes in government spending will have an equal effect on GDP and income compared to changes in taxes.

iv. Changes in government spending will have a smaller effect on GDP and income than will changes in taxes.

mauvetrout59

1. The multiplier helps explain

A. why a decrease in taxes causes real Gross Domestic Product (GDP) to fall by more than the amount of the decrease in taxes.

B. why a fall in investment cause real Gross Domestic Product (GDP) to rise by more than the amount of the decrease in investment.

C. why a rise in government expenditures causes real Gross Domestic Product (GDP) to rise by more than the amount of the increase in government spending.

D. why an increase in disposable income causes real Gross Domestic Product (GDP) to rise by less than the amount of the increase in disposable income.

2. If the marginal propensity to save (MPS) increases, the multiplier

A. decreases.

B. can either increase or decrease, depending on what happens to the marginal propensity to consume (MPC).

C. stays the same.

D. increases.

QUESTION 60

The investment function will shift when there is a change in

		A. the opportunity cost of retained earnings.
		B. firms' profit expectations.
		C. the cost of borrowing.
		D. the interest rate.

1.43 points

QUESTION 61

In the Keynesian model, whenever planned saving exceeds planned investment,

		A. there will be unplanned inventory accumulation.
		B. real GDP will not be influenced.
		C. the interest rate will remain unchanged.
		D. there will be unplanned inventory depletion.

1.43 points

QUESTION 62

In the Keynesian model, whenever planned saving is less than planned investment,

		A. there will be unplanned inventory depletion.
		B. the interest rate will remain unchanged.
		C. there will be unplanned inventory accumulation.
		D. real GDP will not be influenced.

1.43 points

QUESTION 63

Government purchases

		A. are determined by the political process.
		B. are determined by the public.
		C. are influenced by interest rates.
		D. are determined by suppliers.

1.43 points

QUESTION 64

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP),

		A. real GDP will either fall or remain unchanged, depending on the MPC.
		B. real GDP will rise.
		C. real GDP remains unchanged.
		D. unplanned inventories will increase and real GDP will fall.

1.43 points

QUESTION 65

When the economy is operating at the equilibrium level of GDP, we know that

		A. total planned real expenditures equal real GDP.
		B. real net exports equal inventory changes.
		C. planned real investment spending equals real net exports of zero.
		D. total planned real consumption expenditures equal real GDP.

1.43 points

QUESTION 66

One divided by the marginal propensity to save (MPS) is the formula for

		A. the inverse of the multiplier.
		B. the multiplier.
		C. one minus the multiplier.
		D. autonomous consumption.

QUESTION 67

Thinking like an economist would, which is true of investment?

		A. Investment represents spending on capital goods.
		B. Investment is a stock concept.
		C. Investment is putting money into stocks and bonds.
		D. It is the portion of disposable income that is not used for consumption or saving.

QUESTION 68

Other things being equal, if input prices rise in a country, then there would be

		A. cost-push inflation.
		B. demand-pull inflation.
		C. cost-pull deflation.
		D. more production and a lower price level.

QUESTION 69

In the short run, if the price level rises, then the overall economy can temporarily produce beyond its nominal capacity. One reason for this is that

		A. existing capital equipment can be used more intensively.
		B. wage rates rise almost simultaneously with the price level.
		C. the unemployment rate usually rises dramatically along with the price level.
		D. workers can be switched from counted to uncounted production.

fuchsiaclam197

Assume an economy that consists of consumers, government, business investors, and an international sector. We will express this economy this way: C + I + G + X = GDP.

Assume the MPS is 0.2.

How much can we expect the economy to expand if government increases its spending by $300B and at the same time, Congress imposes a tax increase of the same amount ($300B) to pay for the increased spending and that tax increase causes C to fall by $240B? Show your work.

Hint: You have to calculate the multiplier and apply it appropriately. Determine the effect of the fall in C on GDP. Determine the effect of the increase in government spending on GDP. What is the net result?

blueleopard487

ECON 104 Lecture Notes - Lecture 13: Procyclical And Countercyclical, Fiscal Multiplier, Fiscal Policy

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