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Question 10 A young ruler, Daenerys (a.k.a. Mother of Dragons), advocates taxing

ID: 1129794 • Letter: Q

Question

Question 10 A young ruler, Daenerys (a.k.a. Mother of Dragons), advocates taxing consumption rather than income. Which of the following statements would support her position? a. A consumption tax is a better automatic stabilizer for the economy b. Taxing consumption does not cause any dead-weight losses or unintended dragon attacks c. The rich consume a higher fraction of income than the poor. d. The current tax code discourages people from saving. Question 11. If a $1,000 increase in consumer's income leads to a $600 increase in consumption expenditures, then: a. The marginal propensity to consume equals 0.4 and the multiplier equals 2.5. b. The marginal propensity to consume equals 0.6 and the multiplier equals 2.5. c. The marginal propensity to consume equals 0.4 and the multiplier equals 1.66. d. The marginal propensity to consume equals 0.6 and the multiplier equals 1.66 Question 12. Suppose that the multiplier effect a function of the marginal propensity to consume effecets, which of the following actions would shift the aggregate-demand curve to the right by results in a multiplier greater than 1. If there are no crowding-out or investment accelerator more than the initial amount? a. An increase in government expenditures. b. An increase in net exports. c. An increase in investment spending. d. All of the above.

Explanation / Answer

10) Option d is correct

Taxing income discourages people from saving as their dividends, interest incomes are taxed. A consumption tax would prevent this negative impact on savings.

11) MPC = change in consumption expenditure / change in consumer's income

MPC = 600/1000 = 0.6

Multiplier = 1/(1 - MPC) = 1/0.4 = 2.5 (Option b is correct)

12) Option d is correct

Expenditure multiplier acts on all of the above (All form a part of the aggregate expenditure = C + I + G + NX)

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