Introductory Macroeconomics

Book: Introductory Macroeconomics

Chapter: 5. The Government: Budget And The Economy

Subject: Social Science - Class 12th

Q. No. 10 of Exercises

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10

Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier.

The tax multiplier is smaller in absolute value than the government expenditure multiplier because the government expenditure affects the total expenditure and taxes through the multiplier.

The tax multiplier also influences the disposable income which affects the overall consumption level.


Let us explain it with the help of an example -


Suppose MPC (c) is 0.60


Government expenditure multiplier = 1/1-c


= 1/1-0.6


= 2.5


Tax multiplier = - c/1-c


= - 0.6 /1-0.6


= - 1.5


This shows that government expenditure multiplier is more than the tax multiplier.


10

More Exercise Questions

1

Explain why public goods must be provided by the government.
2

Distinguish between revenue expenditure and capital expenditure.
3

‘The fiscal deficit gives the borrowing requirement of the government’. Elucidate.
4

Give the relationship between the revenue deficit and the fiscal deficit.
5

Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.
6

Consider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50, TR = 100 (a) Find the equilibrium level of income and the autonomous expenditure multiplier in the model. (b) If government expenditure increases by 30, what is the impact on equilibrium income? (c) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?
7

In the above question, calculate the effect on output of a 10 per cent increase in transfers, and a 10 per cent increase in lump-sum taxes. Compare the effects of the two.
8

We suppose that C = 70 + 0.70Y D, I = 90, G = 100, T = 0.10Y (a) Find the equilibrium income. (b) What are tax revenues at equilibrium income? Does the government have a balanced budget?
9

Suppose marginal propensity to consume is 0.75 and there is a 20 per cent proportional income tax. Find the change in equilibrium income for the following

(a) Government purchases increase by 20 (b) Transfers decrease by 20.
10

Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier.
11

Explain the relation between government deficit and government debt.
12

Does public debt impose a burden? Explain.
13

Are fiscal deficits inflationary?
14

Discuss the issue of deficit reduction.