Most macroeconomists believe it is a good thing thattaxesact

as automatic stabilizers and lower the size ofthemultiplier.

However, a smaller multiplier means that the changeingovernment

purchases of goods and services, government transfers,

or taxes necessary to close an inflationary or recessionary

gap is larger. How can you explain thisapparentinconsistency?

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Samantha BalandoLv7

28 Sep 2019

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Most macroeconomists believe that it is a good thing that taxes act as an automatic stabilizer and lower the size of the Keynesian multiplier. First, explain both â how do taxes act as an automatic stabilizer? And how do they affect the size of the multiplier? However, a smaller multiplier means that the change in government spending needed to erase an expansionary or recessionary gap is larger. Is this an inconsistency? Why or why not?

A smaller multiplier means that the change in government purchases of goods and services or taxes necessary to close an inflationary or recessionary gap is larger. Explain this apparent inconsistency?

violetlizard702

1. One of the shortcomings of fiscal policy is that:

a. it has significant time lags which make it more effective.

b. it takes effect immediately, thus it is the best policy to use at crunch time.

c. it affects aggregate demand indirectly through the interest rate.

d. it has time lags and sometimes it may end up destabilizing the economy as a result of these lags.

2. Suppose the government increases taxes by more than is necessary to close an inflationary gap. Which would most likely result?

a. Equilibrium real GDP will be more than anticipated.

b. The economy could move into a recession.

c. The economy will generate a larger inflationary gap than anticipated.

d. This will not have any adverse effects on the economy, since inflation has been abated.

3. Assume that the marginal propensity to consume is 0.8 and the potential output is $800 billion. The tax multiplier is ____, and the transfer multiplier is _____:

a. -0.8; 0.8

b. -0.2; 0.25

c. -5.0; 4.0

d. -4.0; 4.0