Question

Suppose that the current equilibrium GDP for a country is $13.5 trillion and that potential GDP is $14.3 trillion. How much does a change in tax revenue restore the economy to potential GDP, assuming the value of the government purchase multiplier is equal to 2 and a tax multiplier equal to -1.6 tax revenue decreases by $800 billion tax revenue increase by $800 billion tax revenue decrease by $500 bilion tax revenue decrease by $400 billion Suppose that the government allocates $1 billion for new roads. It also raises taxes by $1 billion to keep the deficit from growing. The absolute value of the government purchase multiplier is 3.33 and that of the tax multiplier is 2.33. What is the effect on equilibrium GDP GDP does not change. OGDP increases by $ 2.33 bilion. GDP increases by $3.33 billion o GDP increases by $1 billion. Which of the following is an example of discretionary fiscal policy? An increase in total unemployment benefit payments during a recession due to rising unemployment. An increase in corporate tax collection during an expansion because of more sales. A decrease in total unemployment benefit payments during an expansion due to decreasing unemployment. Government builds more schools as the young population grows.

Answer 1

First step ans explanation: - change in GDP = Tax multiplier *Change in tax revenue change in GDP = 14.3 - 13.5 = 50.8 trillion tax multiplier = -1.6 the negative sign on the multiplier indicates that change in tan and change in GDP movie in opposite direction. Thus, change in tax revenue = 0.8/- 1.6 = $ - 0.5 trillion thus to reach potential GDP tan revenue has to decrease by $400 billion.