For the following questions assume the model: :
f(Y) ie, MPI = O Tx=Txo
5.2. Given a saving function of -25 + .25 Yd, a $10 billion tax cut will increase the level of income by:
a. $25 billion
b. $30 billion d. $50 billion
c. $40 billion e. $60 billion
5.3. If the MPC is zero, the investment multiplier is:
b. one d. indeterminate
c. zero e. one less than the tax multiplier.
5. 4. Given C = 20 + .8Yd, a $10 billion tax cut would shift the consumption function upward by: (Note what is being asked for, and work it out)
a. $10 billion.
b. more than $10 billion.
c. less than $10 billion.
d. cannot be determined.
5.5. If the MPS is 0.4, which of the following is not true?
a. the MPC must be 0.6
b. the investment multiplier is 2.5
c. a $40 billion drop in investment spending will reduce the level of income by
d. there must be negative saving in the economy
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