1. a. Assume the US marginal propensity to consume is.95. How much economic grow

Question

1. a. Assume the US marginal propensity to consume is.95. How much economic growth would a Keynesian economist expect to see after a $15 billion infrastructure spending bill passes? b. What would a Neo-Classical economist say to the analysis in the previous question? c. Assume the state of Arizona wanted to create $100 million of real economic growth by boosting aggregate demand. If the marginal propensity to consume is.75, how much government spending would be required to create that level of growth? d. e. If the marginal propensity to consume is.75, how much in tax cuts would be required to create that level of growth?

Explanation / Answer

A.Multiplier(K)=1/1-MPC

K=1/1-.95

K=20

Change in GDP=K*increase in government spending

GDP growth=20*15=300 billions

2.The neo classicals believe that the government intervention should generally be short term focusing on increase in aggregate demand.However,in the long long run the market must be let free to adjust on its own.

Thus,the effect of this won't matter in the long run.

3.Change in GDP=100 Million

K=20

Change in spending=change in GDP/K

Change in spending=100/20=5 millions

4.When MPC=.75

K=4

Change in spending=GDP growth/k

Change in spending=100/4=25 millions

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