Chapter 11

Question 1

Why does the oversimplified formula overstate the multiplier?

Answer 1

1) ignores income tax (most important) 2) ignores changes in prices 3) ignores change in imports

Question 2

How do tax changes compare to gov spending when it comes to stimulating the economy?

Answer 2

tax changes have smaller multiplier effect than government spending (because not all of them are spent, some are saved)

Question 3

What automatic stabilizers are in place in the more advanced model?

Answer 3

Income tax (makes changes in income smaller), unemployment insurance; gov will continue to spend at same levels for a while…

Question 4

How does the government raise GDP?

Answer 4

1) Raising their purchases 2) reducing taxes 3) increasing transfers

Question 5

Why is it not so easy to manipulate GDP?

Answer 5

Moving target that we don’t know, we don’t know multipliers, things take time to have effects.