Question

When government spending increases by​ $1, planned expenditures increase by​ $1 A. times the spending multiplier and the equilibrium level of income will increase by​ $1. B. and the equilibrium level of income will increase by​ $1. C. and the equilibrium level of income will increase by less than​ $1. D. and the equilibrium level of income will increase by​ $1 times the spending multiplier. When taxes are cut by​ $1, planned expenditures A. increase by​ $1 and the equilibrium level of income will increase by​ $1 times the tax multiplier. B. increase by less than​ $1 and the equilibrium level of income will increase by​ $1 times the tax multiplier. C. increase by​ $1 and the equilibrium level of income will increase by​ $1 times the spending multiplier. D. decrease by​ $1 and the equilibrium level of income will decrease by​ $1 times the tax multiplier.

Answer 1

Answer:

1) and the equilibrium level of income will increase by $1 times the spending multiplier

2) increase by less than $1, and the equilibrium level will increase by $1 times the tax multiplier

Explanation:

1) Given that increase in government spending leads to increase in planned expenditure. The increased amount will therefore be multiplied with spending multiplier to get equilibrium income level. Since government spending increases by $1 which increases the planned expenditure by $1, therefore to get equilibrium income level, $1 will be multiplied with spending multiplier.

2) When the tax rate are cut planned expenditure is expected to increase. The amount cut from tax is multipled by the tax multiplier to get equilibrium income level. Therefore if taxes are by $1 which leads to an increase in the planned expenditure by less than $1. To get equilibrium income level, $1 will be therefore be multiplied with tax multiplier.