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Author Question: An economy has a fixed price level, no imports, and no income taxes. An increase in autonomous ... (Read 60 times)

MirandaLo

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on: Jun 29, 2018
An economy has a fixed price level, no imports, and no income taxes. An increase in autonomous expenditure of 2 trillion increases equilibrium expenditure by 8 trillion.
 
  Calculate the multiplier and explain what happens to the multiplier if an income tax is introduced.

Question 2

Refer to Table 4-8. What is the equilibrium hourly wage (W) and the equilibrium quantity of labor (Q)?
 
  A) W = 8.50; Q = 380,000 B) W = 8.50; Q = 360,000
  C) W = 9.00; Q = 370,000 D) W = 9.00; Q = 740,000


chreslie

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Reply #1 on: Jun 29, 2018
Answer to Question 1

The multiplier is defined as the change in equilibrium expenditure divided by the change in autonomous expenditure. In this problem the multiplier equals 8 trillion  2 trillion which is 4.0
If an income tax is introduced, the multiplier decreases in value. With an income tax, at each spending round less disposable income is created leading to smaller increases in induced expenditure.

Answer to Question 2

C


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