The graph that follows shows the planned-expenditure function for a hypothetical

Question

The graph that follows shows the planned-expenditure function for a hypothetical economy. Like the black point (X symbol) to indicate the equilibrium income in this economy. Dashed drop lines will automatically extend to both axes. Suppose that taxes in this economy increase by $20, causing________________in disposable income. Because the marginal propensity t0 consume is equal to________________, this means consumption will________________by________________, which is in this case. Knowing this information, use the green line (triangle symbols) to plot the new planned-expenditure function for this economy when taxes increase by $20. Then use the red point (cross symbol) to indicate the new equilibrium income. Dashed drop lines will automatically extend to both axes. You can conclude that a $1 increase in taxes________________equilibrium income by________________. Therefore, the tax multiplier for this economy is________________. Which of the following formulas for the tax multiplier is correct and consistent with this quantitative result? Tax multiplier - 1/(1 - MPC) Tax multiplier = (1 - MPC)/-MPC Tax multiplier = -MPC/(1 + MPC) Tax multiplier = -MPC/(1 - MPC) The following graph shows the IS curve for this economy before any changes in fiscal policy. Use the green points (triangle symbols) to graph the IS curve when taxes increase by $20 by plotting the three points at a real interest rate of 7%, 3%, and 1%.

Explanation / Answer

1. Causing decrease in INcome

2. MPC = 0.5

3. will decrease

4. by 50% of change in income

5. $20

6. Decreases equilibrium Income

7. $1

8. is -1

9. Tax Multiplier = -MPC/(1-MPC)

10 IS curve will shift , such that it passes through (10,7), (30.3) and (60,1) .

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