Consider two open economies, Country A and Country B. In Country A, the marginal propensity to consume is 0.8, the tax rate is 10%, and the marginal propensity to import is 5%. In Country B, the marginal propensity to consume is 0.7, the tax rate is 20%, and the marginal propensity to import is 15%. Based on this information, how do the aggregate demand curves and the multipliers of the two countries compare?

Policy Impact on Economic Stability

Factors Affecting the Aggregate Demand Slope

In an open economy with a government, the introduction of an income tax will always make the aggregate demand curve flatter than it would be in an otherwise identical economy without taxes, regardless of the value of the marginal propensity to import.

For an economy where total planned spending changes in response to changes in national income, match each economic event to its effect on the slope of the aggregate demand curve.

Tax Policy and Its Impact on Aggregate Demand

In an open economy with a government, if the marginal propensity to consume is 0.75, the income tax rate is 20%, and the marginal propensity to import is 0.1, the slope of the aggregate demand curve is ____.

Four open economies with government sectors have different characteristics that influence how total spending responds to changes in national income. Based on the parameters provided for each economy, arrange them in order from the one with the flattest aggregate demand curve to the one with the steepest.

Evaluating Trade Policy for Economic Stability

An open economy with a government wants to increase the responsiveness of its aggregate demand to changes in national income. If the government cannot change the income tax rate, which of the following combined changes to consumer and trade behavior would achieve this goal?

Multiplier Reduction via Taxes and Imports