1. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is 0.6 , and the expenditure multiplier for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases income yet again, causing a second change in consumption equal to - . The total change in demand resulting from the initial change in government spending is

1. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is 0.6 , and the expenditure multiplier for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases income yet again, causing a second change in consumption equal to - . The total change in demand resulting from the initial change in government spending is

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Explanation it correctly and details Q)Suppose that economists observe than an increase in government spending of $6 billion raises total demand for goods and services by $16 billion. (a) If these economists ignore the possibility of crowding out, what would they estimate the marginal propensity to consume (MPC) to be? (b) Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than the initial level? Explain your answer.
1.) If the MPC is 0.8 and taxes increase by $100 billion, what is the effect on equilibrium RGDP? equilibrium RGDP will fall by $80 billion equilibrium RGDP will fall by $125 billion equilibrium RGDP will fall by $400 billion equilibrium RGDP will fall by $500 billion 2.) If equilibrium RGDP is $10000 billion and full employment GDP is $9000 billion, and the MPC = 0.75, what is the appropriate fiscal policy to return the economy to full employment GDP reduce taxes by $250 billion reduce taxes by $333.33 billion raise taxes by $250 billion raise taxes by $333.33 billion
Suppose there is some hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is 0.65 , and the spending multiplier for this economy is 2.8571 . Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to (blank). This increases income yet again, leading to a second chance in consumption equal to (blank) . The total change in demand resulting from the initial change in government spending is (blank) .
Explain why the multiplier effect of an increase in consumption spending of $100 billion is larger or smaller than the effect of a tax decrease of $100 billion. (Do not just say the spending multiplier is larger or smaller. Explain why.)
There is a tax-cut that increases your Disposable Income by $3,400, which you intend to save $510. a. Calculate the MPC. b. Interpret this MPC. (What does it mean? Define MPC and describe in this context.)c. What is the resulting fiscal multiplier? d. Interpret the multiplier and describe the multiplier effect. e. Find the total change to the economy from this tax change.
4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is 0.8, and the spending multiplier for this economy is 5. Suppose the government in this economy decides to decrease government purchases by $400 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to -$2,000 billion. This decreases income yet again, leading to a second change in consumption equal to The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the multiplier effect takes place. For simplicity, assume that…
Initially, the economy is producing $13 trillion in goods and services and the government is spending $2 trillion.Then the government decides to increase its spending to $2.7 trillion. a) What is the value of the spending multiplier? b) Compute the new equilibrium level of output. Assume that the marginal propensity to consume is 0.7 (MPC=0.7).
Consider an economy in which the marginal propensity to consume is 0.8 and GDP is currently at 12,000. a) The government wishes to increase GDP to 13,000, and it is considering changing only one of its fiscal tools: 1. government purchases 2. taxes 3. transfer payments How much would the government have to change each of these fiscal policy tools to achieve its goal? (Use the simple spending multiplier for this part and below.) b) Suppose instead that the government wishes to reduce GDP to 10,000, and again, it is considering using only one of its three available fiscal policy tools. How much would it change each of these fiscal tools to achieve its goal?
2. Fiscal policy Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should be used. Economist A believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist B believes that the government spending multiplier is 4 and the tax multiplier is 2. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect. Policy Options for Closing Output Gap Increase in Spending Tax Cut (Billions of dollars) Spending Multiplier (Billions of dollars) Tax Multiplier 4 Economist A 8 Economist B 4 2 Economist C favors increases in government spending over tax cuts. This means that Economist C…
Suppose the MPC is 34 and the government wants to increase output by $2000. 1. How much should government spending increase? 2. How much should taxes decrease? (You can leave your answer as a fraction) 3. Describe the intuition behind why these two values are different 4. Suppose instead the government wants to decrease output by $ 2000. By how much should they raise taxes?
1 et Question 3 There is an inflationary gap of $40 billion in the economy. The MPC is 75%. What is the MPS [Select] and the Government Spending Multiplier [Select] Government need to [Select] much [Select] change taxes, would they [Select] the Tax multiplier [Select] [Select] ? Would the spending? By how ? If the Government decided to taxes? What is and by how much
5. Fiscal policy, the money market, and aggregate demand Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate demand curve (AD₁). Suppose the government increases its purchases by $2.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD2) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 AD. 1 102 104 106 108 110 OUTPUT (Billions of dollars) 112 114 116 þ f AD₂ AD 3 The following graph shows the money market in equilibrium at an interest rate of 3% and a quantity of money equal to $15 billion. Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the…