They give us the answers but I want to know how they got them, in other words a

Question

They give us the answers but I want to know how they got them, in other words a drawn out walk through of the problems. Thanks!

Scenario 2 Consider the Chapter 3 model. Suppose the consumption equation is represented by the following: C-2000.75YD, that investment is fixed (I - I), and that government expenditures and taxes are determined exogenously. Suppose the economy is currently in short-run equilibrium, but President Trump (the government) decides that it wants to achieve two goals: lead the economy to more output, and reduce the current government deficit. To achieve this, the government decides to increase both government expenditures and taxes. The increase in taxes will be (1 X) times the increase in government spending, where X>0 (strictly greater than zero since the president's goal is to reduce the deficit) 8. Refer to Scenario 2. What value of X would cause the short run equilibrium output to be unaffected by this fiscal policy? A. X-1/3 would cause the short run equilibrium output to be unaffected by this fiscal policy B. X-1/4 would cause the short run equilibrium output to be unaffected by this fiscal C. X 1/2 would cause the short run equilibrium output to be unaffected by this fiscal D. X-1 would cause the short run equilibrium output to be unaffected by this fiscal E. X 3/2 would cause the short run equilibrium output to be unaffected by this fiscal policy policy policy policy F. This fiscal policy will affect the short run equilibrium output regardless of the value of X

Explanation / Answer

8) MPC = 0.75

Expenditure multiplier = 1 / (1 - MPC) = 1/0.25 = 4

Tax multiplier = - MPC/ (1 - MPC) = - 3

Taxes are increased by (T) = (1 + X) x increase in government expenditure (G)

Increase in SR output due to increase in expenditure = Decrease in SR output due to increase in taxes

G x 4 = 3 x G x (1 + X)

X = 1/3 (Option A is correct)

9)

Option F is correct (Consumption would be affected regardless of the value of X because increase in government expenditure/increase in taxes, both would increase/decrease the real output which would affect the consumption as the latter is related to the level of output through MPC)

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