I just need a little help on a few questions:
- Why does a tax cut have a smaller multiplier than a hike in government spending if its the same amount?
- Federal tax drops from 20 to 30 percent. Due to that income increases from 600BLN to 800BLN, logical explaination is that workers have increased their work efforts. Would this be a movement along the downward sloping or upward sloping Laffer Curve? Why?
- Explain the theory that crowding out can weaken our nullify the effect of expansionary fiscal policy finaced by federal government borrowing.
1) Because of the first round effects. Initially, a $100 of government spending raises GNP by $100. (Y=C+I+G). However with taxes, with a $100 decrease in taxes, some goes into consumption, some to savings. We assume that consumption increases by mpc*100 and savings by (1.-mpc)*100.
2) "Federal tax DROPS from 20 to 30 percent" Hmmmmmm, did you mean from 30 to 20 percent? In that case, you would be on the upward slopint, left-of-peak portion of the Laffer Curve.
3) When govt borrows, demand for loanable fund rises (government uses a larger portion of the pool of loanable money), which causes interest rates to rise, causing private investment to fall. Government spending crowded out private investment.