1) Suppose households consume 80% of their disposable income. The government is

Question

1) Suppose households consume 80% of their disposable income. The government is considering three actions to help increase GDP: increasing government spending, cutting taxes, or increasing fixed transfer payments.

If the government increases transfer payments by $100 billion, by how much will real GDP increase? (Express your answer in billions of dollars.)

Hint: First, calculate the transfer multiplier. Remember: transfers = negative taxes.

$_________ billion

2)True or False: A fixed tax cut has a smaller effect on the economy than an increase in government spending by the same amount.

Explanation / Answer

80$ billion False

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