True or False: In an open economy with a government, if the marginal propensity to import increases by the same percentage point amount that the income tax rate decreases, the size of the spending multiplier will remain unchanged, assuming all other factors (like the marginal propensity to consume) are constant.
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Consider two economies, Country A and Country B, which are identical in every way (including their tax rates and consumption habits) except for their international trade patterns. Country A has a high marginal propensity to import, meaning its citizens spend a large fraction of any new income on foreign goods. Country B has a low marginal propensity to import. If both governments enact an identical, one-time increase in autonomous government spending, which of the following outcomes is most likely?
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A government plans to implement a fixed-amount increase in its spending to stimulate the economy. Economic advisors project that in the future, the average income tax rate will be higher, and households will spend a larger proportion of any additional income on goods from other countries. Assuming all other economic conditions remain the same, when would this fixed spending increase have a greater effect on total national income?
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Evaluating a Policy Statement on Fiscal Stimulus and Trade
Consider two economies, Alpha and Beta, which have the same marginal propensity to consume. In Alpha, the income tax rate is 25% and the marginal propensity to import is 5%. In Beta, the income tax rate is 15% and the marginal propensity to import is 15%. If both governments introduce an identical increase in autonomous spending, in which economy will this stimulus have a larger effect on total income, and why?
True or False: In an open economy with a government, if the marginal propensity to import increases by the same percentage point amount that the income tax rate decreases, the size of the spending multiplier will remain unchanged, assuming all other factors (like the marginal propensity to consume) are constant.
An economy with both a government that taxes income and an international trade sector experiences a one-time, autonomous increase in investment. Arrange the following events to show the correct sequence of the multiplier process that follows this initial spending.
Match each economic scenario with the correct description of its spending multiplier. Assume the marginal propensity to consume is the same in all scenarios.