1. If the government uses tax cuts to expand the economy, it would be using policy ............................

2. Social security payments that are paid by the government to households are an example of a ..............................

3. Suppose a household receives a wage income of $4,000 a month, and receives $400 in transfers and pays $800 in taxes per month. Then the household's ......................income (the income after paying taxes and receiving transfers) would be equal to $3,600 per month.

4. The progressive income tax and transfer payments such as unemployment compensation are examples of ..................................., because these tax and spending institutions increase government revenues and lower government outlays during an expansion (and decrease government revenues and raise government outlays during a contraction) thereby smoothing out the business cycle.

5.

Suppose it was found that the mpc varied by income level in the following manner, with lower income households spending a greater portion of every dollar of income than higher income households.

Household income MCP Income/spending multiplier Tax multiplier

0-$30,000 0.9

$31,000 - 50,000 0.8

$51,000 - 80,000 0.75

$80,000 and above 0.6

Calculate the government spending and tax multipliers for each income bracket

considered separately.

Suppose the government decided to use tax cuts to expand the economy, and was debating whether to direct tax cuts to high income households or low income households.Which choice would provide a greater stimulus? Thus, which would do the least amount of damage to the government budget deficit to achieve a given amount of stimulus?

(Note: Technically, while tax cuts can, by design of the policy, be targeted so that their initial impact is on the incomes of a particular group, the feedback effects represented by the multiplier probably in general depend on the economy- wide average value of the mpc. We abstract from this issue in this question.)

1. Calculate the GDP Gap when the Real GDP is at 700 billion and the potential Real GDP is 1200 billion.

B. The spending multiplier is 2. How much is needed to close the Gap?

2. Explain Fiscal Policy.

3. What are the differences between expansionary and contractionary fiscal policy?

1. If MPS is 0.3 and MPI is 0.10 calculate the spending multiplier.
2. Consumer Saves 30% ofextra income, spends 70% domestically and 10% on imports solve for the tax multiplier.
3. If themarginal propensity to save is 47%, and the marginal propensity to import is 53% how much is the spending multiplier?
4. If a consumer saves 37% of income while spending 25% domestically and 18% importing. How much is the tax multiplier?