Discuss how the marginal propensity to consume, imports, and ...

[jeatrice]

Discuss how the marginal propensity to consume, imports, and marginal tax rates influence the expenditure multiplier.
 
  What will be an ideal response?

Question 2

An increase in disposable income leads to a
 
  A) rightward shift of the supply of loanable funds curve.
  B) rightward shift of the demand for loanable funds curve.
  C) downward movement along the supply of loanable funds curve.
  D) leftward shift of the supply of loanable funds curve.
  E) leftward shift of the demand for loanable funds curve.

[Jane]

Answer to Question 1

The simple expenditure multiplier, in an economy with no imports or income taxes, is 1/(1 - MPC), where MPC is the marginal propensity to consume. The MPC measures how much consumption changes when disposable income changes. The larger is the MPC, the larger is the expenditure multiplier. Both the taxes and imports decrease the size of the expenditure multiplier because both taxes and imports divert changes in GDP from consumption expenditure on domestic goods and services. The larger the marginal tax rate and the larger the marginal propensity to import, the smaller the expenditure multiplier. The larger the marginal tax rate, the smaller the change in disposable income from any change in GDP and, as a result, the smaller than induced change in consumption expenditure. The larger the marginal propensity to import, the more increased consumption expenditure falls on imported goods and so the smaller the effect on domestically produced goods and services.

Answer to Question 2

A

[jeatrice]

Thank you

[Jane]

Happy to help you