Please help on macroeconomic question - fiscal policy?
i) True or false?
ii) Explain
If the government reduces its expenditures so the budget maybe balanced, some government transfers will automatically increase, reducing the multiplier effect.
Answer:
(1) "Maybe" should be a dead giveaway. True means always, False means it might be true but not all the time.
(2) The explanation has to do with which multiplier is being referenced. If you mean consumption multiplier, there should be no problem unless the tax rate changes. If you mean government purchases multiplier, the answer is ambiguous depending on what sort of expenditures are being changed.
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ii) Explain
If the government reduces its expenditures so the budget maybe balanced, some government transfers will automatically increase, reducing the multiplier effect.
Answer:
(1) "Maybe" should be a dead giveaway. True means always, False means it might be true but not all the time.
(2) The explanation has to do with which multiplier is being referenced. If you mean consumption multiplier, there should be no problem unless the tax rate changes. If you mean government purchases multiplier, the answer is ambiguous depending on what sort of expenditures are being changed.
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