Assessment 5
Started on Tuesday, 17 September 2024,
State Finished
Completed on Tuesday, 17 September 2024,
Time taken
Marks 20.00/20.00
Grade 100.00 out of 100.00
Question 1
Which of the following is correct regarding the effect of expansionary monetary policy
in the Keynesian model?
a.
The consumption function swivels downward showing a fall in aggregate spending
and income.
b.
The aggregate spending curve will shift downward showing a fall in aggregate
spending and income.
c.
Investment spending will increase, which is shown by an upward shift of the
aggregate spending curve.
d.
Firms will choose to invest less.
Feedback
An expansionary monetary policy occurs when the monetary authorities reduce the
repo rate, thereby reducing the interest rate. As the interest rate (cost of borrowing)
falls, investment spending increases. The increase in investment spending will be
shown by an upward shift of the aggregate spending curve.
Firstly, a downward swivel of the consumption function is caused by an increase in
tax rate and not interest rate, which then results in a fall in aggregate spending and
income. Secondly, firms will invest more due to the fall in cost of borrowing.
1
, 2024 – S2 – ECS1601 – ASSESSMENT 5 – Q&A
Question 2
Which of the following is correct about the introduction of tax in the economy?
a.
Taxes influence aggregate spending and income in a direct way by increasing
spending and disposable income.
b.
Disposable income is equal to c(1-t)Y.
c.
In South Africa as your personal income increases the tax rate also increases.
d.
When the government raises the tax rate, the size of the multiplier remains
unchanged.
Feedback
Your answer is correct.
In South Africa, progressive tax is used where an individual pays more tax as their
income increases. High-income earners pay a larger percentage of tax compared to
low-income earners. (See page 59 on prescribed book.)
Firstly, taxes represent a leakage, as money is withdrawn from the economy. For
example, when the minister of finance announces that taxes are to increase during a
budget speech. This will cause people’s income after tax (disposable income) to
decrease. That is, they will have less money available for spending. Hence,
aggregate spending decreases. Secondly, disposable income is taxable income
minus tax. Yd= Y-T, of which T=t*Y or Yd= Y-tY. Thirdly, the multiplier is affected by
the tax rate. This is because the tax rate reduces the slope of the consumption
function, which causes the multiplier to be small after the introduction of tax rate.
Question 3
The introduction of the foreign sector in the Keynesian model______ the slope of the
consumption function. As a result, the multiplier becomes______.
a.
increases; larger
2
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