6. If the MPC =.75, a $100 billion decrease in taxes would Increase output by $7

Question

6. If the MPC =.75, a $100 billion decrease in taxes would Increase output by $75 billion b. a. Increase output by $100 billion Increase output by $300 billion d. c. Increase output by $400 billion George earns $50,000 per year and won a lottery prize of $10,000. If George's MPC is.60, how much of the $10,000 will George SAVE? a. $1,000 b. $4000 C. $8000 d. $10,000 Money and Banking The required reserve ratio is 10 percent. A bank with $10 million in demand deposits has 700,000 in cash and $200,000 in reserves. The excess reserves of the bank are now a. $100,000 b. $800,000 C. $900,000 8. $ 1 millior

Explanation / Answer

Ans:

6) Option D

Increases output by $400 billion.

Multiplier = 1 / (1-mpc)

= 1 / (1-0.75)

= 1 / 0.25

= 4  

effect of decrease in taxes on output = $100 billion * 4

= $400 billion

7) Option B

savings = $4000

Marginal propensity to consume(MPC) + Marginal Propensity to save(MPS) = 1

Marginal Propensity to save(MPS) = 1 - Marginal propensity to consume(MPC)

= 1 - 0.60

= 0.4

Hence, savings = $10,000 * 0.40

= $4000.

8) Option A

-$100,000

Required reserves = $10 million * 10%

= $1 million

Excess reserves = ($200,000 + $700,000) - $1,000,000

= $900,000 - $1,000,000

= -$100,000

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