For the next three questions, go back to the original
consumption function (C = 80 + 0.4(Y-T)), and suppose instead that
there is a decrease in tax (assume no change in government spending
now).
- What will the effect be on consumption. (You can answer this
based on your intuitive understanding of the model, or you can
answer it by plugging numbers of your choosing into the model to
compute an answer mathematically.)
a) no change
b) rise
c) fall
-What is the effect of the tax decrease on the interest rate in this model?
a) no change
b) fall
c) rise
What is the effect of the tax decrease on investment in this model?
a) rise
b) fall
c) no change
Answer:
1]
A] rise
Explanation:
Since tax falls, then disposable income ( gross income - taxes) rise.
Hence consumption will rise too.
2]
Correct option: B] rise
As tax falls, disposable income rises, .Consumption increases, so it's like fiscal expansion, which always leads to increase in interest rate & so investment falls.
3]
Correct option: A] fall
As tax falls, disposable income rises, .Consumption increases, so it's like fiscal expansion, which always leads to increase in interest rate & so investment falls.
For the next three questions, go back to the original consumption function (C = 80 +...