1.In an IS LM model an exogenous increase in govt. exp. will lead to: the answer says : an increase in investment can anyone explain the concept behind it? 2.In a certain year production was 100 units out of which 80 were sold. Imports decline by 30 units. The increase in GDP would be:?? The answer is : Change by 100 units How?? 3.In a simple Keynesian model , the income tax is lump-sum . An increase in lump sum tax by 5 units when MPC is 0.5 units would 1. will raise aggregate output 2.will lower consumption dd at the eqb level of output by 5 units 3.will lower equilibrium output by 5 units 4.will lower consumption dd by more than 5 units 4.In National income accounting , a ceteris paribus increase in indirect taxes accompanied by an equal amount of reduction in personal tax will reduce national income and keep personal income unchanged. how??
Q1) When there is an exogenous increase in Govt Exp, the money supply will increase which will bring down the interest rates. When interest rates fall, investments rise. (This is what i guess the reasoning is. I'm not very sure) Q4) NI is measured gross of direct taxes. However, indirect taxes are subtracted to arrive at NI at basic prices. So an increase in indirect tax will reduce the NI. However, personal income is unchanged because, people continue to lose money in the name indirect taxes what they were losing in the name direct taxes.
1. An increase in G will increase Y. According to the accelerator theory an increase in Y will increase I. Maybe this is it? 2. GDP is output, ie production. 3. An increase in lump sum taxation decreases disposable income. Since mpc = 0.5, this decreases consumption by 2.5. This is subject to the multiplier effect. Since k=2, equilibrium income will fall by 5. 4. Not sure about this one. In national income accounting, gross income (ie before tax) is added together to get GDP at basic prices so it shouldn't be affected by changes in taxation. GDP at market prices would increase if indirect taxes were increased, ie the prices in the shops would be higher, but these are then deducted to get GDP at basic prices.
