Fiscal effect of an increase in taxes
Not what you're looking for?
A government is currently operating with an annual budget deficit of $40 billion. The government has determined that:
--The marginal propensity to consume is 0.75.
--To eliminate an inflationary gap and take into account the resulting change in the price level, the government must generate a net leftward shift in the aggregate demand curve equal to $40 billion.
Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? Explain by giving appropriate reasons.
Purchase this Solution
Solution Summary
This solution gives detailed calculations showing how to determine the total effect on Aggregate Demand of a tax increase.
Solution Preview
If MPC is 0.75, then the economy's Spending Multiplier (SM) is 1/(1-MPC) = 1/0.25 = 4
The Tax Multiplier (TM) = 1 ...
Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.