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Fed policies and the tax multiplier

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1 .Any point to the left and below the IS-curve means that :

there is excess demand for goods and services in the expenditure sector
there is excess supply of goods and services in the expenditure sector
the expenditure sector is in equilibrium but the money sector is not
there is excess demand in the money sector
there is excess supply of money in the money sector

2. Assume that the price level is flexible both upward and downward and that the Fed's policy is to keep the price level from either rising or falling. If aggregate supply increases in the economy, the Fed:

will have to increase interest rates to keep the price level from falling.
will have to reduce the money supply to keep the price level from rising.
will have to increase the money supply to keep the price level from falling.
can keep the price level stable without altering the money supply or interest rate.

3. Suppose that the economy starts at equilibrium and the mpc = 0.8. What would be the effect of a $500 increase in taxes once all the rounds of the multiplier process are complete?

An increase of $500 in taxes causes equilibrium output to decrease by 1000.
An increase of $500 in taxes causes equilibrium output to decrease by 2000.
An increase of $500 in taxes causes equilibrium output to increase by 2000.
An increase of $500 in taxes causes equilibrium output to decrease by 400.
An increase of $500 in taxes causes equilibrium output to increase by 400.

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Solution Summary

Tax multiplier, Fed policy, and points below the IS curve.

Solution Preview

1 .Any point to the left and below the IS-curve means that :

there is excess demand for goods and services in the expenditure sector

Since the IS curve represents equilibrium in the market for goods, points below the IS curve represent situations in which there is excess ...

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