Question 1 (d)
- Minimum required change in government spending = Value of recessionary gap / Spending Multiplier
The minimum required change in taxes will be greater than the minimum required change in government spending.
The tax multiplier (mpc/mps = 0.8/0.2 = 4) is smaller than the government spending multiplier (1/mps = 1/0.2 = 5) because part of the initial increase in disposable income caused by the decrease in income tax will be saved rather than spent.
Question 1 (e)
- Lower income tax rate --> More disposable income --> More consumption and investment --> Increase in Aggregate Demand
Question 3 (a)
Foreign exchange market for the euro
The supply of Euro in the foreign exchange market will increase because when real interest rates in Japan increased, people with euros will want to invest in Japan's financial assets because they will see a high return.
To purchase Japan's financial assets, they will demand yen from the foreign exchange market, leaving behind euro.