In the Keynesian income-expenditure model which includes both a government sector and an external sector, an increase in autonomous consumption, government expenditure or investment combined with an increase in the marginal tax rateGroup of answer choiceswould increase the multiplier and reduce net exports, assuming the multiplier remains greater than onewould lead to a higher equilibrium level of income and an unchanged level of net exports while the multiplier would be reducedwould lead to an increase in net exports, assuming that the multiplier remains greater than onewould reduce the multiplier but, assuming this remains greater than one, equilibrium income would rise and net exports would fall.
Question
In the Keynesian income-expenditure model which includes both a government sector and an external sector, an increase in autonomous consumption, government expenditure or investment combined with an increase in the marginal tax rateGroup of answer choiceswould increase the multiplier and reduce net exports, assuming the multiplier remains greater than onewould lead to a higher equilibrium level of income and an unchanged level of net exports while the multiplier would be reducedwould lead to an increase in net exports, assuming that the multiplier remains greater than onewould reduce the multiplier but, assuming this remains greater than one, equilibrium income would rise and net exports would fall.
Solution 1
In the Keynesian income-expenditure model which includes both a government sector and an external sector, an increase in autonomous consumption, government expenditure or investment combined with an increase in the marginal tax rate would reduce the multiplier but, assuming this remains greater than one, equilibrium income would rise and net exports would fall.
Explanation:
An increase in autonomous consumption, government expenditure, or investment would increase aggregate demand, leading to a higher equilibrium level of income. However, an increase in the marginal tax rate would reduce the multiplier effect because it reduces disposable income and thus the amount of income that can be spent or saved.
Assuming the multiplier remains greater than one, the increase in aggregate demand would still lead to a higher equilibrium level of income, even though the increase would be less than it would have been with a lower tax rate.
The increase in income would lead to an increase in imports (since people typically buy more foreign goods when their income rises), which would reduce net exports (exports minus imports). Therefore, net exports would fall.
Solution 2
The correct statement is: "would reduce the multiplier but, assuming this remains greater than one, equilibrium income would rise and net exports would fall."
Here's a step-by-step explanation:
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In the Keynesian income-expenditure model, an increase in autonomous consumption, government expenditure, or investment increases aggregate demand, leading to a higher equilibrium level of income.
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An increase in the marginal tax rate reduces disposable income, which reduces consumption and thus aggregate demand. However, because the marginal propensity to consume is less than one, the decrease in aggregate demand is less than the increase in taxes. Therefore, the net effect on aggregate demand is positive, leading to a higher equilibrium level of income.
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The multiplier is the ratio of the change in income to the initial change in spending that brought it about. An increase in the marginal tax rate reduces the multiplier because it reduces the portion of additional income that is spent on consumption.
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An increase in income leads to an increase in imports (assuming the marginal propensity to import is positive), which reduces net exports.
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Therefore, an increase in autonomous consumption, government expenditure, or investment combined with an increase in the marginal tax rate would reduce the multiplier but, assuming this remains greater than one, equilibrium income would rise and net exports would fall.
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