25. Suppose that there is no marginal tax rate. Assume that the marginal propens

Question

25. Suppose that there is no marginal tax rate. Assume that the marginal propensity to consume is equal to 0.8. The spending multiplier: is equal to 0.2 is equal to 1.25 is equal to 5 a) b) ) is equal to 4 26. a) One implication of the life-cycle model is that: tax cuts do not affect output an increase in taxes will raise output government spending is contractionary permanent tax cuts are more expansionary than temporary tax cuts of the same magnitude b) 27. An increase in the marginal tax rate will: raise volatility in both output and raise interest rates raise volatility in output and lower interest rates c) reduce volatility in output d) have no impact on output volatility Consider the spending multiplier with taxes. Let b denote the marginal propensity to consume. If the marginal tax rate is equal to 1 (ie, it is equal to 100%) then the spending multiplier with taxes is equal to: 28. 14)) 1/(1-b) c) 1-b d) b 29. Suppose that investment is independent of interest rates. This implies that: a) monetary policy will be potent b) the crowding out effect will be large there will be no crowding out d) tax cuts will have no effect on output

Explanation / Answer

25. The right answer is option C.

Explanation:

Spending multiplier = 1/ (1-MPC) = 1/(1-0.8) = 1/0.2 = 5

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