Assume that a hypothetical economy with an MPC of 0.8 is experiencing a severe r

Question

Assume that a hypothetical economy with an MPC of 0.8 is experiencing a severe recession.

By how much would government spending have to rise to shift the aggregate demand curve rightward by $30 billion?

Instructions: Round your answer to two decimal places.

$ billion

How large a tax cut would be needed to achieve the same increase in aggregate demand?

Instructions: Round your answer to two decimal places. Enter a positive value.

$ billion

Determine one possible combination of government spending increases and tax increases that would accomplish the same goal.

Increase spending by $ billion and increase taxes by $ billion.

Explanation / Answer

Spending Multiplier =1/(1 ? MPC)

30 = X * 1/(1 -0.8)

X = 6

Mpc * tax = 30

tax = 30/0.8 = 37.5

combination

let tax cut increase dmand by 10 and spending multiplier by 20

0.8 * tax = 10

tax cut = 12.5

and 20 = X * 1/(1 -0.8)

X = 4

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