5 .00 points An economy is initielly et full employment, but e decreese in plann

Question

5 .00 points An economy is initielly et full employment, but e decreese in planned investment spending (a component of autonomous expenditure) pushes the economy into recession. Assume thet the merginel propensity to consume (mpc) of this economy is O75 and that the multiplier is 4 a. How large is the recessionary gap after the fall in planned investment? The recessionary gap stimes the size of the fall in planned investment. b. By how much would the government have to change its purchases to restore the economy to ful employment? The (Click to soloct n purchases should be Cick to solect h fall In planned Investment c. Alternatively, by how much would the government have to change taxes? Instruction: Round your response to the nearest whole peroant The government would have to Cick to soocttaxes by an amount that is percent Cickto loct the decline in planned investment d. Suppose thet the government's budget is initielly in belance, with government spending equel to texes collected. A balanced-budget law forbids the government from running e deficit. Is there enything thet fiscel policymekers could do to restore full employment in this economy, assuming they do not want to violate the balanced-budget law? Docroase taxes while incroasing government spending by a greator amount, which will result in a nat increase in autanamousexpure without offsetting the balanood budgot Decrease both govemment spending and taxes by the same amount, which wil result in a net Increase in autonomous expenditure wthout offsetting the balanced budget Decrease govemment spending and increase texes by the same amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget Increasa both govemment sponding and taxos by tho samo amount, wich will result in a not increase in autonomous expendituro without offsetting the balanced budget

Explanation / Answer

Given that fall in investment is creating a recessionary gap and multiplier is 4, the resultant fall in income will be 4 times the fall in investment.

a) It is four times the fall in investment

b) Since multiplier is 4, rise in purchases by same amount as fall in investment eliminates the gap. Government has to increase the purchases which is equal to the fall in investment

c) tax multiplier is given by -MPC/1 - MPC = -0.75/0.25 = -3

Hence government has to reduce taxes by an amount that (400/3 - 100) = 33.33% more than the fall in investment

d) BBM has a value of 1. This implies that balanced budget has increased or decreased government budget and taxes by the same amount. Hence correct option is D.

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