In the Basic Keynesian Model, a Tax Increase

question 70

Multiple Choice

In the basic Keynesian model, a tax increase:

• A)reduces short-run equilibrium output.
• B)increases short-run equilibrium output.
• C)reduces potential output.
• D)increases potential output.

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Definitions:

Deposit Expansion Multiplier

A ratio that indicates the potential increase in money supply through the banking system's ability to lend more based on reserves.

Vault Cash

The physical money that banks keep in their vaults as part of their reserves.

Reserve Requirement

The minimum amount of reserves that banks must hold, either in their vaults or on deposit with a central bank, as a regulatory measure intended to ensure bank liquidity.

Open Market Operations

The actions of central banks in purchasing and selling government securities with the aim of regulating the money supply and managing interest rates.