Effects of Government Tax Increase on Consumption, Investment, and Interest Rate Quiz
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Questions and Answers

What happens to private savings if disposable income decreases by $200 billion in the economy described?

  • Private savings increases by $200 billion.
  • Private savings decreases by $200 billion.
  • Private savings increases by $120 billion.
  • Private savings decreases by $120 billion. (correct)
  • If national savings increases by $80 billion in the economy described, what is the change in investment?

  • Investment increases by $80 billion.
  • Investment increases by $40 billion. (correct)
  • Investment decreases by $80 billion.
  • Investment decreases by $40 billion.
  • How does an increase in government spending affect national savings in the economy described?

  • National savings increases.
  • National savings doubles.
  • National savings remains unchanged.
  • National savings decreases. (correct)
  • If the equilibrium interest rate in the economy described is 8%, what is the level of investment?

    <p>$850</p> Signup and view all the answers

    What is the impact on private saving if consumption increases by $50 billion?

    <p>Private saving decreases by $50 billion.</p> Signup and view all the answers

    If government spending is raised by $500 in the economy described, what happens to the equilibrium interest rate?

    <p>The equilibrium interest rate increases.</p> Signup and view all the answers

    What happens to consumption when the government raises taxes by $100 billion?

    <p>Decreases due to a lower disposable income</p> Signup and view all the answers

    How does private savings change when the government increases taxes by $100 billion?

    <p>Decreases due to lower disposable income</p> Signup and view all the answers

    What happens to public savings when the government raises taxes by $100 billion?

    <p>It increases by the full amount of the tax increase</p> Signup and view all the answers

    How does investment change when the government increases taxes by $100 billion?

    <p>Increases due to higher total savings and a lower interest rate</p> Signup and view all the answers

    If the marginal propensity to consume is 0.6, what does this suggest about the impact of tax increases on private savings?

    <p>Private savings decrease less than public savings increase</p> Signup and view all the answers

    Why does total savings increase when the government raises taxes by $100 billion?

    <p>Due to an increase in private savings</p> Signup and view all the answers

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