Author Question: The tax multiplier is most likely to be larger than the expenditure multiplier when ________. A) ... (Read 22 times)

jparksx · **on:** Jun 30, 2018

The tax multiplier is most likely to be larger than the expenditure multiplier when ________.

A) monetary policy is at the zero lower bound
B) rising inflation causes the real interest rate to decline
C) when the change in tax revenue is large relative to the change in government purchases
D) the expansionary fiscal policy is expected to be followed by higher taxes

Question 2

What does the Classical model predict about the relationship between a country's budget balance (total revenue minus total spending) and a country's level of real interest rates and investment in a closed economy? Use a graph of the capital

market to illustrate.

juicepod · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

D

Answer to Question 2

A higher budget deficit shifts the I+(G-T) curve to the right, increasing real interest rates. Higher real interest rates lead to a reduction in the quantity demanded of investment.