5. Show why a $10 billion reduction in government purchases of goods and services will have a larger effect on real GDP than a $10 billion reduction in government transfers by completing the accom- panying table for an economy with a marginal propensity to consume (MPC) of 0.6. The first and second rows of the table are filled in for you: on the left side of the table, in the first row, the $10 billion reduction in government purchases decreases real GDP and disposable income, YD, by $10 billion, lead- ing to a reduction in consumer spending of $6 billion Rounds 1 2 3 4 5 6 7 8 9 10 Decrease in G=-$10 billion (billions of dollars) Change in real GDP Change in G or C AG= $10.00 AC = -6.00 AC = ? AC = ? AC = ? AC = ? AC = AC = AC = AC= ? ? ? ? -$10.00 -6.00 ? ? ? ? ? ? ? ? Change in YD -$10.00 -6.00 ? ? ? ? ? ? ? ? Change in TR or C ATR=-$10.00 AC = AC = AC = AC = AC = AC = AC = AC = AC = (MPC x change in disposable income) in row 2. How- ever, on the right side of the table, the $10 billion reduction in transfers has no effect on real GDP in round 1 but does lower YD by $10 billion, resulting in a decrease in consumer spending of $6 billion in round 2. -6.00 ? ? ? ? ? ? ? ? a. When government purchases decrease by $10 billion, what is the sum of the changes in real GDP after the 10 rounds? b. When the government reduces transfers by $10 bil- lion, what is the sum of the changes in real GDP after the 10 rounds? Decrease in TR=-$10 billion (billions of dollars) c. Using the formula for the multiplier for changes in government purchases and for changes in trans- fers, calculate the total change in real GDP due to the $10 billion decrease in government purchases and the $10 billion reduction in transfers. What explains the difference? [Hint: The multiplier for government purchases of goods and services is 1/(1-MPC). But since each $1 change in govern- ment transfers only leads to an initial change in real GDP of MPC × $1, the multiplier for govern- ment transfers is MPC/(1- MPC).] Change in real GDP $0.00 -6.00 ? ? ? ? ? ? ? ? Change in YD -$10.00 -6.00 ? ? ? ? ? ? ? ?

MACROECONOMICS
14th Edition
ISBN:9781337794985
Author:Baumol
Publisher:Baumol
Chapter11: Managing Aggregate Demand: Fiscal Policy
Section: Chapter Questions
Problem 2TY
icon
Related questions
Question
5. Show why a $10 billion reduction in government
purchases of goods and services will have a larger
effect on real GDP than a $10 billion reduction in
government transfers by completing the accom-
panying table for an economy with a marginal
propensity to consume (MPC) of 0.6. The first and
second rows of the table are filled in for you: on the
left side of the table, in the first row, the $10 billion
reduction in government purchases decreases real
GDP and disposable income, YD, by $10 billion, lead-
ing to a reduction in consumer spending of $6 billion
Rounds
1
2
3
4
5
6
7
8
9
10
Decrease in G=-$10 billion
(billions of dollars)
Change in
real GDP
Change in
G or C
AG = -$10.00
AC =
AC =
AC =
AC =
AC =
AC =
AC =
AC =
AC =
-6.00
?
?
?
?
?
?
?
?
-$10.00
-6.00
?
?
?
?
?
?
?
?
Change in
YD
-$10.00
-6.00
?
?
?
?
?
?
?
?
Change in
TR or C
ATR=-$10.00
AC =
AC =
AC =
AC =
AC =
AC =
AC =
AC =
AC =
(MPC x change in disposable income) in row 2. How-
ever, on the right side of the table, the $10 billion
reduction in transfers has no effect on real GDP in
round 1 but does lower YD by $10 billion, resulting
in a decrease in consumer spending of $6 billion in
round 2.
-6.00
?
?
?
?
?
?
?
?
a. When government purchases decrease by $10 billion,
what is the sum of the changes in real GDP after the
10 rounds?
b. When the government reduces transfers by $10 bil-
lion, what is the sum of the changes in real GDP
after the 10 rounds?
Decrease in TR -$10 billion
(billions of dollars)
c. Using the formula for the multiplier for changes in
government purchases and for changes in trans-
fers, calculate the total change in real GDP due to
the $10 billion decrease in government purchases
and the $10 billion reduction in transfers. What
explains the difference? [Hint: The multiplier for
government purchases of goods and services is
1/(1-MPC). But since each $1 change in govern-
ment transfers only leads to an initial change in
real GDP of MPC × $1, the multiplier for govern-
ment transfers is MPC/(1-MPC).]
Change in
real GDP
$0.00
-6.00
?
?
?
?
?
?
?
?
Change in
YD
-$10.00
-6.00
?
?
?
?
?
?
?
?
Transcribed Image Text:5. Show why a $10 billion reduction in government purchases of goods and services will have a larger effect on real GDP than a $10 billion reduction in government transfers by completing the accom- panying table for an economy with a marginal propensity to consume (MPC) of 0.6. The first and second rows of the table are filled in for you: on the left side of the table, in the first row, the $10 billion reduction in government purchases decreases real GDP and disposable income, YD, by $10 billion, lead- ing to a reduction in consumer spending of $6 billion Rounds 1 2 3 4 5 6 7 8 9 10 Decrease in G=-$10 billion (billions of dollars) Change in real GDP Change in G or C AG = -$10.00 AC = AC = AC = AC = AC = AC = AC = AC = AC = -6.00 ? ? ? ? ? ? ? ? -$10.00 -6.00 ? ? ? ? ? ? ? ? Change in YD -$10.00 -6.00 ? ? ? ? ? ? ? ? Change in TR or C ATR=-$10.00 AC = AC = AC = AC = AC = AC = AC = AC = AC = (MPC x change in disposable income) in row 2. How- ever, on the right side of the table, the $10 billion reduction in transfers has no effect on real GDP in round 1 but does lower YD by $10 billion, resulting in a decrease in consumer spending of $6 billion in round 2. -6.00 ? ? ? ? ? ? ? ? a. When government purchases decrease by $10 billion, what is the sum of the changes in real GDP after the 10 rounds? b. When the government reduces transfers by $10 bil- lion, what is the sum of the changes in real GDP after the 10 rounds? Decrease in TR -$10 billion (billions of dollars) c. Using the formula for the multiplier for changes in government purchases and for changes in trans- fers, calculate the total change in real GDP due to the $10 billion decrease in government purchases and the $10 billion reduction in transfers. What explains the difference? [Hint: The multiplier for government purchases of goods and services is 1/(1-MPC). But since each $1 change in govern- ment transfers only leads to an initial change in real GDP of MPC × $1, the multiplier for govern- ment transfers is MPC/(1-MPC).] Change in real GDP $0.00 -6.00 ? ? ? ? ? ? ? ? Change in YD -$10.00 -6.00 ? ? ? ? ? ? ? ?
Expert Solution
Introduction

Aggregate Demand: Aggregate demand in an economy is the sum of private consumption expenditure (C), private investment expenditure (I), government expenditure and the net exports (exports - Imports). 

 

trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 2 images

Blurred answer
Knowledge Booster
Tax Rates
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
MACROECONOMICS
MACROECONOMICS
Economics
ISBN:
9781337794985
Author:
Baumol
Publisher:
CENGAGE L
ECON MACRO
ECON MACRO
Economics
ISBN:
9781337000529
Author:
William A. McEachern
Publisher:
Cengage Learning
Macroeconomics: Principles and Policy (MindTap Co…
Macroeconomics: Principles and Policy (MindTap Co…
Economics
ISBN:
9781305280601
Author:
William J. Baumol, Alan S. Blinder
Publisher:
Cengage Learning