Solve question 1, 2, 3 and 4 on the basis of this information. In a closed economy along with a lumpsum, tax the government is committed to decrease its expenditure as national income grows i.e. .
Q1. What is the government expenditure multiplier in the economy?
Q2. What is the tax multiplier?
Q3. It is given that government’s marginal propensity to spend out of national income is negative. Suppose its absolute value is equal to the marginal propensity to consume then multiplier would be
Q4. The balanced budget multiplier will be
d. independent of G1
Q5. Given a proportional tax, IS schedule will be steeper (with the same intercept) in which of the following cases?
a. When marginal propensity to consume out of disposable income is lower
b. When marginal propensity to consume out of income is lower
c. When interest sensitivity of investment is low
d. Both a and b
e. Both b and c
f. Both a and c
Solve question 6 and 7 based on the following information. In an economy the planned investment is 100 million pounds. People now decide to increase their propensity to save by 10% such that saving function changes from S=0.3Y to S=0.4 Y.
Q6. The total savings in the economy will be
a. Higher by 10%
b. Lower by 10%
c. Increase by 10 billion
d. Does not change
e. It is none of the above, rather it will be ____________
Q7. What happens to the multiplier?
a. The value of multiplier increases
b. The value of multiplier decreases
c. The value of multiplier remains the same
d. It is ambiguous
Q8. In an economy with government that maintains a balanced budget, the equilibrium condition would be
d. All of the above
e. Both a and c
f. Both b and c
g. Both a and b
Q9. Some economics students were given a project to analyze the economic variables of their economy to test whether their economy is in equilibrium or not. Various students made their way into the ministries office and found out from the national accounts that investment and savings are equal. They concluded that economy is in equilibrium. Which of the following assertion is correct?
a. The conclusion was correct
b. The conclusion was incorrect because in reality an economy cannot be in equilibrium
c. The conclusion was incorrect because in an economy with government public savings should also be considered
d. None of the above, rather it is incorrect because national accounts tell actual saving and investment which are always equal, even in disequilibrium.
Q10. What happens to the IS schedule if there is a transfer of income from the rich to poor in an economy?
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