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Author Question: If an increase in government spending of 40 units accompanied by an equal increase in taxes caused ... (Read 111 times)

jazziefee

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on: Jun 30, 2018
If an increase in government spending of 40 units accompanied by an equal increase in taxes caused equilibrium income to rise by 40 units, the autonomous expenditure multiplier must be
 
  a. 10.
  b. 1.
  c. 4.
  d. not enough information is given to calculate the multiplier.

Question 2

How do you suppose most people form an expectation of future inflation? Is that method consistent with the assumption of adaptive expectations?
 
  What will be an ideal response?


vkodali

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Reply #1 on: Jun 30, 2018
Answer to Question 1

D

Answer to Question 2

Like any mechanic in the Bronx, most people distil a gut opinion from their personal experience and what they read in the papers, hear from others, etc. While expert analysis of projected trends has some influence, greater weight is placed, probably, on whether inflation has seemed recently high, or rising, or declining, or low, and expected inflation is an extrapolation from those observations. Adaptive expectations exaggerates to an exclusive reliance on the past, but seems a reasonable approximation of the actual method.


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