Agreements and disagreements among economists regarding fiscal policy

Consider a hypothetical economy in which households spend $0.90 of each additional dollar of their after-tax income. The expenditure multiplier for this economy is (1).

Suppose that this economy is experiencing a recession. The government would like to stimulate aggregate demand and is deciding whether it should increase its spending by $1 billion or reduce income tax by $1 billion. Assume other things remain constant, and the marginal propensity to consume remains at 0.9.

Before any multiplier effect takes place, a $1 billion increase in government spending will increase the aggregate demand by $(2) billion, while a $1 billion reduction in income tax will increase the aggregate demand by $(3) billion.

Now consider the effect of each fiscal policy after the multiplier effect is complete. A $1 billion increase in government spending will result in a total increase of aggregate demand by $(4) billion, whereas a $1 billion reduction in income tax will result in a total increase of aggregate demand by $(5) billion.

Keynesians believe that the multiplier effect of an increase in government spending will be (Greater than/Less than/ Equal to) that of a tax cut of the same amount.

True or False: The impact of a one-time tax rebate tends to be greater than a permanent tax cut.(6)

False

True