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Test4BonusQ's

# Test4BonusQ's - provided above will be considered Answer 2...

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BONUS QUESTIONS (TEST 4) NAME ID 1. It is said that a progressive tax system acts as an ‘automatic’ stabilizer. Propose a simple example of progressive tax system and explains why it is an automatic stabilizer. Answer 1 An example in which the tax rate increases with income would work. This is an automatic stabilizer because when the economy does not do well the average tax rate drops and the multiplier increases. 2. The economy is below potential output by \$5. Imagine that the short run aggregate supply is horizontal. The government wants to bring the economy on its potential output. The marginal propensity to consume is 0.8. Two options are on the table: To increase transfers and to increase government spending on goods and services. Explain which one of the two policies is preferable and why. Only answers based on the quantitative data

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Unformatted text preview: provided above will be considered. Answer 2 The multiplier for G is 1/(1-0.8). Hence an increase of G by 1 causes output to increase by 5. However the multiplier for TR is only 0.8/(1-0.8). Therefore TR have to increase by more than 1 (by 5/4) if output has to get at its potential level. A G-policy is better because the government deficit does not increase as much as with a Transfer policy. 3. The currency in circulation is about \$700 billion and the amount of deposits is about \$650 billion. Imagine that the reserve ratio is 10%, what is the (actual) money multiplier of this economy? Answer 3 This is the ratio between the supply of money and the monetary base, that is Currency in circulation+Deposits/(currency in circulation +reserves). Therefore it is equal to (700+650)/(700+65)=1.76 Summary Answer 3 ________________________...
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