Question

The government decides to increase its expenditures by $350. The multiplier in this economy is 4 and the tax rate is 22 percent. The net effect of this expansionary fiscal policy is to: Group of answer choices

Answer 1

Increase the budget shortage by $42

Step-by-step explanation:

The government decides to increase expenditure by $350

The multiplier in the income is 4

The tax rate is 22%

= 22/100

= 0.22

The first step is to calculate the increase in income

= $350×4

= 1,400

The tax revenue which will be derived from the new income can be calculated as follows

= 0.22×1,400

= 308

Therefore, the net effect can be calculated as follows

Net effect= $350-$308

= $42

Hence the net effect of this expansionary fiscal policy is to make an increase in the budget shortage by $42