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Author Question: The IS model implies that a dollar of government spending has a larger impact on equilibrium output ... (Read 89 times)

clmills979

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on: Jun 30, 2018
The IS model implies that a dollar of government spending has a larger impact on equilibrium output than does a dollar of taxes. Explain.
 
  What will be an ideal response?

Question 2

The nominal GDP of Year 2 is
 
  A) 800.
  B) 1050.
  C) 1900.
  D) 2400.


zhanghao

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

In the IS equation, government purchases are a component of autonomous spending, no different than autonomous consumption, investment, and net exports. From the perspective of producers, a customer is a customer. Taxes, clearly, are not an expenditure. Taxes affect expenditure by reducing disposable income and, thus, consumption. Since only a fraction of disposable income is spent for consumption  a fraction measured as the marginal propensity to consume  each dollar of taxes corresponds to a fraction of a dollar taken from consumption expenditure.

Answer to Question 2

D


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