Assume That Taxes Depend on Income

question 184

Multiple Choice

Assume that taxes depend on income. The MPC is 0.8 and t is 0.25. The government spending multiplier is

• A) 1.67.
• B) 2.5.
• C) 5.
• D) 10.

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Definitions:

Equilibrium Output

The level of output at which the quantity of goods produced equals the quantity of goods consumed in an economy, with no external pressures to change.

Short-Run Aggregate Supply Curve

A graphical representation showing the positive relationship between the total production of goods and services (aggregate supply) and the price level in the short term.

Expansionary Gap

A situation where the real GDP is higher than the potential GDP, often leading to inflationary pressures as demand outstrips supply.

Price Level

The collective median of current prices for goods and services in the economy.