Assuming the federal government maintains a balanced budget, the most likely effects of a tax increase on government expenditures and real GDP are: Government Expenditures Real GDP A) Increase Increase B) Decrease Decrease C) Increase Decrease
Govt expenditure obviously increases. im guessing real gdp will decrease, as lower consumption, and fewer hours worked (due to higher taxes-although depending or where you are on teh laffer curve hours worked could increase). but then when you consider the effect in the labour market on inflation all kinds of things could happen. and given the increase on govt spending, gdp could easily go up. i think im over thinking this…
C - Gov’t needs to spend the excess tax income to maintain the balanced budget. Higher tax makes people work less and GDP falls. ??
I’m working on my eco review now but my guess is A) both increase gov’t expenditure obviously yes as kurupt1 stated. my guess is that gov’t spending (since there is a balanced budget) will be larger than the decrease in consumption. gov’t is stepping in to pick up the decrease in demand. interesting. curious what the answer is!
A was correct! The amount of the spending program exactly offsets the amount of the tax increase, leaving the budget unaffected (balanced budget). The multiplier effect is stronger for government spending versus the tax increase. Therefore, the balanced budget multiplier will be positive. All of the government spending enters the economy as increased expenditure, whereas only a portion of the tax increase results in lessened expenditure (determined by the marginal propensity to consume), because part of the tax increase will come from the savings of the taxpayer (determined by the marginal propensity to save).
good ole’ multiplier effect…we’ll see how truth meets reality in a few yrs
A because when the tax increase reduce C and I but G increase by a greater amount. So GDP will increase. if corporate and individual income are not taxed, people will spend some and will save some, by contract the income tax received by the government will all be spend.
clearly CFAI have never played sim city, putting the taxes up just makes everyone leave your country no matter how much of it you spend ! by the way esco, was that a CFAI question?
A
Both will increase , GDP will increase much more the spending increase , it’s some phenomenon , it’s written in books .