7. Problems and Applications Q7 Suppose economists observe that an increase in government spending of $14 billion raises the total demand for goods and services by $42 billion. If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be Now suppose the economists allow for crowding out.

7. Problems and Applications Q7 Suppose economists observe that an increase in government spending of $14 billion raises the total demand for goods and services by $42 billion. If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be Now suppose the economists allow for crowding out.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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.
What is the effect of an increase in taxes when the economy is above full employment? What is the magnitude of the tax multiplier? An increase in taxes when the economy is above full employment _______ aggregate demand and real GDP, and the price level _______. A. increases; falls B. increases; rises C. does not change; does not change D. decreases; falls The magnitude of the tax multiplier is equal to _______. A. MPC times the government expenditure multiplier B. the government expenditure multiplier divided by MPC C. MPC D. the government expenditure multiplier
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10. Agreements and disagreements among economists regarding fiscalpolicy Consider a hypothetical economy in which households spend $0.75 of each additional dollar of their after-tax income. The expenditure multiplier for this economy is Suppose that this economy is experiencing a recession. The government would like to stimulate aggregate demand and is deciding whether it should increase its spending by $1 billion or reduce income tax by $1 billion. Assume other things remain constant, and the marginal propensity to consume remains at 0.75. Before any multiplier effect takes place, a $1 billion increase in government spending will increase the aggregate demand by s $1 billion reduction in income tax will increase the aggregate demand by billion, while a billion. Now consider the effect of each fiscal policy after the multiplier effect is complete. A $1 billion increase in government spending will result in a total increase of aggregate demand by $ billion, whereas a $1 billion…
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…
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…
2. Determine the multiplier and the net effect of the following autonomous changes in spending: a. An influx of $100 billion in government spending when the marginal propensity to consume is 0.75. b. An influx of $250 billion in business investment when the marginal propensity to consume is 0.5. C. An influx of $180 billion in export sales revenue when the marginal propensity to consume is 0.8.
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