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Principles of Macroeconomics: A Study Guide

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1 b 2 a 3 d 4 b 5 b 6 b 7 b 8 c 9 c 10 b 11 c 12 b 13 b 14 d 15 c 16 d 17 b 18 c 19 a 20 d 21 c 22 b 23 d 24 b 25 b 26 b 27 b 28 a 29 b 30 b 31 a 32 a 33 c 34 c 35 d Problem 1. (Answers) a. Y = 3,503.45 b. C = 3233.45 c. Private investment multiplier = 2.76 Government spending multiplier = 2.76 If government spending (or private investment) increases by 100 units, the level of equilibrium income increases by 276 units. d. Government spending multiplier: I. Only lump-sum taxes: A. Government spending multiplier = 1/(1-b) = 4 II. Only marginal income taxes: B. Government spending multiplier = 1/(1-b+bt) = 2.76 Note that B < A. When we have marginal income taxes, every time that income increases, a fraction t of the increase is used to pay taxes.
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Unformatted text preview: That is, disposable income to be consumed is smaller than in the case that we only have lump-sum taxes. Therefore, the increase in consumption in every round and the subsequent income increase are smaller than they would have been in the case of lump-sum taxes. Thus, the final increase in equilibrium income is smaller when we have marginal income taxes. e. Assume that we have lump-sum taxes instead of marginal income taxes. a. Increasing G and T by the same amount. b. They are equal. Problem 2. (In your class notes)...
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