5. Fiscal multipliers The blue line on the following graph shows the planned agg

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5. Fiscal multipliers The blue line on the following graph shows the planned aggregate spending line for a hypothetical economy. The graph also shows a 45-degree line. Initially, the economy is in equilibrium with real GDP at $100 billion. The marginal propensity to consume (MPC) in this economy is 0.5 Tool tip: You can place the green line (triangle symbols) on the graph in order to help you answer this question, but you won't be graded on where you place the line PLANNED AGG. SPENDING (Billions of dollars) 250 225 200 175 150 125 100 75 50 25 New AE 45-Degree Line 0 25 50 75 100 125 150 175 200 225 250 REAL GDP (Billions of dollars] Help Clear Al Clear ALL Suppose the government were to increase government purchases by $50 billion without changing the level of net taxes. This would shift the planned aggregate spending line process has run its course, the new level of equilibrium real GDP will be of the relevant multiplier is . After the multiplier , implying that the value by Now, suppose the government were to decrease net taxes by $50 billion without changing the level of government purchases. This would shift the planned aggregate spending line multiplier process has run its course, the new equilibrium real GDP will be of the relevant multiplier is After the , implying that the value

Explanation / Answer

Suppose the government were to increase government purchases by $50 billion without changing the level of net taxes. This would shift the planned aggregate spending line upwards by $25 billion. After the multiplier process has run its course , the new level of equilibrium real GDP will be $150 billion. Implying that the value of the relevant multiplier is 2 . Now suppose the government were to decrease net taxes by $ 50 billion without changing the level of government purchases. This would shift the planned aggregate spending line upwards by $25 billion. After the multiplier process has run its course , the new level of equilibrium real GDP will be $150 billion. Implying that the value of the relevant multiplier is -2 . (The same as )The two changes must be equal, because an increase in spending must have the same effect as the decrease in taxes.

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