6. Refer to the above information. The addition of a $100 billion lump-sum tax:

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6. Refer to the above information. The addition of a $100 billion lump-sum tax: A reduces the MPC and increases the multiplier B increases the MPC and decreases the multiplier C increases both the MPC and the multiplier D has no effect on either the MPC or the multiplier Answer the next question(s) on the basis of the following information for a mixed open economy. The letters Y. Ca, I Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respecti ively. Figures are in billions of dollars. c.-25+0.75(Y-T) G=Go = 70 T-To-30 7. Refer to the above information. The equilibrium level of GDP for this economy is: A $600. B $530. C $415. D $400. 8. Refer to the above information. The multiplier for this economy is: A 4 B 3. C 2. D 2.33. 9. Refer to the above information. If government desired to raise the equilibrium GDP to $650, it could: A raise G by $45 and reduce T by $10. B raise G by $40 and reduce T by $30. C raise G by $30 or reduce T by $40. D raise both G and Tby $40 10. Refer to the above information. If the economy's tax schedule was T- 0.2Y rather than T-30, the equilibrium GDP would be: A $387.5 B $518.5. C $316. D $412. A taxes add to government spending, which increases income. B people get angry about taxes and decide to work less C tax increases shift the expenditure line upward. D part of an increase in income is taken away in taxes. 11. The reason that the multiplier is smaller if there are variable taxes (T-2Y, for example) is that

Explanation / Answer

Use the national income identity

C + I + G + (X - M) = Y

25 + 0.75(Y - 30) + 50 + 70 + 10 = Y

This gives Y = 530

7) Correct option is B

8) Multiplier = 1/1 - 0.75 = 4. Correct option is A

9) To increase GDP by 650 from 530 an increase of 120 is required. Tax multiplier is -0.75/0.25 = -3 and spending multiplier = 4. Hence a total of 120/4 = $30 increase from G and 120/3 = 40 from tax is required

Correct option is C

10) In that case we have 25 + 0.75(Y - 0.2Y) + 50 + 70 + 10 = Y

155 + 0.6Y = Y

This gives Y = 387.50. Option A is correct.

11) Option D is correct

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6. Refer to the above information. The addition of a $100 billion lump-sum tax:

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