-11. with an MPC of 0.8 and a GDP gap of $200 billion, the recessionary gap is a
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Question
-11. with an MPC of 0.8 and a GDP gap of $200 billion, the recessionary gap is a. $60 billion. b. $40 billion. c. $50 billion d. $100 billion. -12. Which of the following is an expansionary fiscal policy? A decrease in government spending and an increase in taxes. a. b. An increase in government spending and an increase in taxes. A decrease in government spending and a decrease in taxes. An increase in government spending and a decrease in taxes. c. d. -13. According to the Laffer curve, if the tax rates were too high a. there will be inflation. b. the government will spend too much money. c. there will be a recession. d the government's tax revenues will fall.Explanation / Answer
11. 200 billion = Multiplier x Recessionary gap
200 billion = 1/(1 - 0.8) x Recessionary gap
200 billion = 5 x Recessionary gap
Recessionary gap = $ 40 billion
Answer is b) $ 40 billion
12. d) An increase in government spending and a decrease in taxes.
Expansionary fiscal policy leads to increase in money supply. It includes increase in government spending or reduction in taxes.
13. d) the government's tax revenue will fall.
Laffer curve is inverted U shaped which means increase in tax rate initially increases TR of government but as tax rates become too high then TR starts declining.
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