Suppose the Government Is Deciding Between Either a Reduction in Income

question 33

Essay

Suppose the government is deciding between either a reduction in income taxes or an increase in government purchases.
(A)According to the spending allocation model,all else held constant,what effect will the reduction in income taxes have on the interest rate?
(B)According to the spending allocation model,all else held constant,what effect will the increase in government purchases have on the interest rate?
(C)Consider the following statement and explain whether it is correct or incorrect.Because the reduction in income taxes and the increase in government purchases have the same effect on the interest rate,the two policies have the same effect on the economy.

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Definitions:

Regression Equation

An equation derived in regression analysis that represents the expected value of the dependent variable as a function of one or more independent variables.

Variation

Variation refers to the distribution of data points or values within a dataset, indicating how much the data differ from each other.

Qualitative Variables

Variables that express descriptive, non-numerical qualities or categories.

Indicator Variables

Indicator variables, also known as dummy variables, are numeric variables used in statistical models to represent categorical data, with values typically 0 or 1 indicating the absence or presence of a characteristic.