A country is in the midst of a recession with a real GDP estimated to be $1.8 million below potential GDP. The governement's policy analyss believe the current value of the marginal propensity to consume (MPC) is 0.90. (Please answer all parts) a. If the government wants real GDP to equal potential GDP, by how much should it increase governement spending? Alternatively, by how much should it reduce taxes? b. Suppose that during the recession people have become less confident and decide they will spend only 50% of any additional income. In this case, if the governement increases spending by the amount calculated in part A, will real GDP end up less than , greater than or equal to potential GDP? by how much? c. With the same decrese in consumer spending as described in part B, if the governement decreases taxes by the amount calculated in part A, will real GDP end up less than, greater than or equal topotential GDP? by how much? d. Why is it difficult for the governement to predict exaclty how a change in spending or taxes will affect GDP?
A country is in the midst of a recession with a real
a. If the government wants real GDP to equal potential GDP, by how much should it increase governement spending? Alternatively, by how much should it reduce taxes?
b. Suppose that during the recession people have become less confident and decide they will spend only 50% of any additional income. In this case, if the governement increases spending by the amount calculated in part A, will real GDP end up less than , greater than or equal to potential GDP? by how much?
c. With the same decrese in consumer spending as described in part B, if the governement decreases taxes by the amount calculated in part A, will real GDP end up less than, greater than or equal topotential GDP? by how much?
d. Why is it difficult for the governement to predict exaclty how a change in spending or taxes will affect GDP?
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