1. The multiplier for taxes is greater than the multiplier for government spending. _______ (True/False)
2. A decrease in the tax rate will_______ the government spending multiplier.
3. Economic fluctuations have _______ since World War II.
4. An increase in both government spending and taxes by the same amount _______ GDP.
5. Using Fiscal Multipliers. Suppose that during a recession a country wishes to increase its GDP by 100. The MPC is 0.8.
a. Using the government spending multiplier, by how much should government spending be increased?
b. Using the tax multiplier, by how much should taxes be decreased?
6. The Broken Window Fallacy. Critics of Keynes pointed out that not all spending is really productive. If vandals break windows and you replace them, GDP will certainly rise. Yet, you are probably worse off than before because you had to use resources to repair the windows. Discuss.
7. President Ford’s Theory. During the 1970s, President Gerald Ford proposed that taxes be decreased but that, to avoid increasing the government budget deficit, government spending should be decreased by the same amount.
a. What happens to GDP if taxes and government spending are both decreased by the same amount?
b. Should President Ford have been worried about his tax-reduction plan? Why or why not?
8. Inventory Policies and Economic Stability. In recent years, many companies have adopted Japanese-style just-in-time inventory management. For example, when your cashier at Walmart records your purchase of a new toaster, it automatically triggers a process to re-order a toaster for the store. In the past, store managers had to forecast their inventory needs. Why might this method of inventory management lead to more economic stability?