ECON 203 Exam 3 (Pakhotina) questions with correct answers

Multiplier effect CORRECT ANSWER The increase in consumer spending that occurs when spending by one person causes others to spend more too Disposable income CORRECT ANSWER Income left after paying taxes -consumption is based on the amount of disposable income -people usually consume part of their disposable income and save the rest MPC CORRECT ANSWER Marginal propensity to consume -the amount consumption increases when disposable income increases by $1 -the MPC is a number between 0 and 1 Government spending multiplier CORRECT ANSWER The amount that GDP increases when government spending increases by $1 (1)/(1-MPC) -the multiplier models suggest that government spending is a stronger instrument then tax cuts Taxation multiplier CORRECT ANSWER The amount that GDP decreases by when taxes increase by $1 -tax cuts boost GDP indirectly through an effect on consumption (-MPC)/(1-MPC) -the multiplier effect of tax cuts is smaller than the effect of government spending Crowding out effect CORRECT ANSWER Increase in government spending crowds out private investments