CFA Practice Question
Which of the following will increase the size of expenditure multiplier:
I. Decreased spending on imports.
II. Economy is at full employment level.
III. Reduced tax rates.
I. Decreased spending on imports.
II. Economy is at full employment level.
III. Reduced tax rates.
A. I and III.
B. II and III.
C. all of them.
Explanation: Leakages in the form of taxes and spending on imports will reduce the size of the multiplier. Reduced tax rates and less spending on imports will just do the opposite.
When the economy is at full employment level, there will be no idle production resources. Increased prices, not increased real output would be the effect of the multiplier.
When the economy is at full employment level, there will be no idle production resources. Increased prices, not increased real output would be the effect of the multiplier.
User Contributed Comments 5
| User | Comment |
|---|---|
| ninad123 | why not full employment level? max people have jobs, wage rates high, spending high, expenditure multiplier will increase |
| Andy552 | It's just applying the formula |
| Andy552 | AD = C + I + G + (X-M) Consumption adds Investment adds Government spending adds (so tax is a leakage) Exports adds (so imports are a leakage) Employment level isn't included in the formula. |
| tmunyawiri | Wow |
| thebkr7 | I think that it is not included because if more people are working it does not mean that that dollar gets spent anymore than if less people were working. It would need to affect how much money gets passed on throughout purchases |