Answer to Question #90520 in Macroeconomics for Sung Eun Seok

Question

11. Imports and income taxes make the AE curve ____ steep and ________ the value of the
multiplier.
Select one:
A. less; increase.
B. more; increase.
C. more; decrease.
D. less, decrease

12. If the M.P.C is 0.6 and investment increases by $6 billion, the equilibrium output (Y) will:
A. increase by $10 billion
B. increase by $15 billion
C. increase by $12 billion
D. decrease by $15 billion

Answer 1

11.

D. less, decrease

When income taxes and imports are present, the slope of AE curve will become flatter than it could have been without the income taxes and exports. That is, the curve will be less steep than without income taxes and imports.

The size of the multiplier will decrease when there are imports and income taxes because the spending on the imports and paying income taxes do not lead to an increase in the domestic nation’s real GDP.

12.

B. increase by $15 billion

The investment multiplier when the M.P.C is 0.6 is 2.5. Thus, the equilibrium output(Y) will be;

Increase in investment × Multiplier

=$6 billion × 2.5=$15 billion

Thus, the equilibrium output (Y) will increase by $15 billion