Assume that a hypothetical economy with an MPC of 0.9 is experiencing a severe r

Question

Assume that a hypothetical economy with an MPC of 0.9 is experiencing a severe recession.

By how much would government spending have to rise to shift the aggregate demand curve rightward by $50 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

example

I have the following 3 part question

Assume that a hypothetical economy with an MPC of 0.80 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $30 billion?

I have 25 billion as an answer.


How large a tax cut would be needed to achieve this same increase in aggregate demand?
I have 6.25 billion for an answer

Determine the balanced budget expenditure and tax increase that would accomplish the same goal.

Balanced budget expenditure and tax increase would be:

I have 26 billion.

answer

1. the multiplier=1/1-MPC=1/0.2=5
The government spending should in crease=30/5=$6billion
2.the tax multiplier=MPC/1-MPC=.8/.2=4
The tax-cut should be=30/4=$7.5billion.
3.1/1-MPC- MPC/1-MPC=1,The answer is increase in spending=30 billion, increase in taxes= 30$billion.The spending will increase income=30x5=$150billion.The tax increase will reduce income=30x4=$120billion.In sum the income will increase=150-120=$30billion.

Government spending (G) will shift the AD curve. The fiscal multiplier measures how sensitive the aggregate demand equation is to a change in G.

Fiscal policy is the government influencing the macro economy by changing taxation and spending.

Changes in government spending directly shift the aggregate demand curve.

The multiplier effect and crowding out effect impact the size of the shift in aggregate demand due to government spending.

Government policy that attempts to influence the direction of the economy through changes in government spending or taxes.

In economics, the fiscal multiplier is the ratio of a change in national income to the change in government spending that causes it.

The effectiveness of this method of economic stimulus is heavily debated in economics. Economists, such as Johan Maynard Keynes, are advocates of fiscal expenditure and argue that during times of economic contraction, stimulus packages, including military spending, have greatly encouraged growth and have helped counter a severe recession.

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