Fiscal Policy and the Tax Multiplier Practice (2 of 2)- Macro Topic 3.8

The video tutorial explains how to use the spending multiplier to address a recessionary gap, initially by increasing government spending. It then shifts focus to using tax cuts as a method to close the gap, highlighting that tax cuts have a lesser effect than direct spending. The tutorial walks through calculations with different marginal propensities to consume (MPC), demonstrating how these affect the multiplier and the necessary tax cut to close a $40 billion gap.

What is the primary reason that tax cuts have a smaller effect on closing a recessionary gap compared to government spending?

• Tax cuts are less popular among consumers.

• Tax cuts lead to inflation.

• Tax cuts increase savings more than spending.

• Government spending directly increases aggregate demand.

If the marginal propensity to consume is 0.5, what is the calculated multiplier?

• 2

• 1

• 4

• 3

Why does a 20 billion dollar tax cut not close the recessionary gap when the MPC is 0.5?

• Because the tax cut is too small.

• Because the multiplier is too high.

• Because the entire 20 billion is saved.

• Because only 10 billion is spent, not enough to close the gap.

With an MPC of 0.8, what is the multiplier?

• 4

• 2

• 3

• 5

How much of a 10 billion dollar tax cut is actually spent when the MPC is 0.8?

• 2 billion

• 4 billion

• 8 billion

• 10 billion