Answer to Question #12962 in Macroeconomics for Rachel

Question

Suppose we add government sector with: T=200+0.25*Y, G=990 where T is taxes (net of treansfers) and G is government spending on goods and services.

a) Is the government running a surplus or a deficit? Explain your answer
b) Explain the reason why the multiplier could decrease in value.

Answer 1

a) If taxes are bigger then government spandings that government running a
deficit because of decreasing GDP and restricting existing
resources
Otherwise, government running a surplus.

b) multiplier could
decrease because of impact of taxes, when taxes are growing up , GDP is growing
down/ Changing of GDP is decreasing and multiplier in this case could decrease
too.