Answer to Question #175193 in Economics for Sreeshma

Question

Let m be the marginal propensity to import, t be the rate of a proportional tax and c the marginal propensity to consume. The effect on output of an increase in government spending will be the same in a closed economy with a proportional tax system and in an open economy with no taxes whenever m=tc. True or false, explain.

Answer 1

The volume of national output (income) can change as a result of changes in the behavior of any macroeconomic entity.

Particularly it is necessary to consider the consequences of the fiscal policy of the government, changes in the size of government spending, and taxes.

The state can have a stabilizing effect on the national volume (income) by pursuing an appropriate fiscal (fiscal) policy. Fiscal policy refers to the impact of the state on economic dynamics through changes in government spending and taxation systems.

Government purchases of goods and services are one of the components of aggregate demand. The state is engaged in the production of public goods. To do this, it purchases products created in the private sector. The source of government spending is the state budget, the country's financial plan. It is approved annually. It discusses the main items of expenditure. Therefore, when considering the models of aggregate consumption of goods and services, as part of aggregate demand, they are taken as an exogenous and constant load, that is, they are part of autonomous costs. In this regard, a change in the size of government spending on the purchase of goods, as well as a change in any component of the effect of autonomous expenditures, causes a multiplier effect: a change in their volume for some kind of accompaniment by a change in national output (income).

When procurement contracts for both civilian and military purposes are entered into, this automatically leads to the subsequent recruitment of new workers. Part of their salary is spent on buying consumer goods, the remainder is saved. Demand from suppliers of consumer goods requires additional factors of production, including additional income from hiring will not fall to zero. Thus, each ruble spent on the use of goods and services will cause multiple additional growths in the volume of output (income). The multiplicity of this increase

is equal to the value -—. That is, the multiplier of government spending is equal to the multiplier of autonomous spending.

In addition to direct influence on the market by a beneficial change in the number of its expenses, the state influences the aggregate factor indirectly through the tax system. Taxes calculate deductions from the disposable income and profits of firms, and therefore reduce consumer and investment demand.