A country is in the midst of a recession with real GDP estimated to be $13.5 billion below potential GDP. The government's policy analysts believe the current value of the marginal propensity to consume (MPC) is 0.90. Instructions: Enter numbers rounded to two decimal places. a. If the government wants real GDP to equal potential GDP, it should increase government spending by $[ it could reduce taxes by $[ billion. billion. Alternatively, b. Suppose that during the recession, people have become less confident and decide they will only spend 50% of any additional income. In this case, if the government increases spending by the amount calculated in part a, real GDP will end up (Click to select) potential GDP by $[ billion. c. With the same decrease in consumer spending described in part b, if the government decreases taxes by the amount calculated in part a, then real GDP will end up (Click to select) potential GDP by $ billion. d. Given your answers above, what can we conclude? When the government changes spending or taxes, it is easy to predict the exact impact on real GDP. If the government overestimates the value of the MPC, then its change in spending or taxes will be too large and real GDP will exceed potential GDP. If the government overestimates the value of the MPC, then its change in spending or taxes will be too small and real GDP will fall short of potential GDP. It is easy for the government to predict the value of the MPC prior to any changes in spending or taxes.
A country is in the midst of a recession with real GDP estimated to be $13.5 billion below potential GDP. The government's policy analysts believe the current value of the marginal propensity to consume (MPC) is 0.90. Instructions: Enter numbers rounded to two decimal places. a. If the government wants real GDP to equal potential GDP, it should increase government spending by $[ it could reduce taxes by $[ billion. billion. Alternatively, b. Suppose that during the recession, people have become less confident and decide they will only spend 50% of any additional income. In this case, if the government increases spending by the amount calculated in part a, real GDP will end up (Click to select) potential GDP by $[ billion. c. With the same decrease in consumer spending described in part b, if the government decreases taxes by the amount calculated in part a, then real GDP will end up (Click to select) potential GDP by $ billion. d. Given your answers above, what can we conclude? When the government changes spending or taxes, it is easy to predict the exact impact on real GDP. If the government overestimates the value of the MPC, then its change in spending or taxes will be too large and real GDP will exceed potential GDP. If the government overestimates the value of the MPC, then its change in spending or taxes will be too small and real GDP will fall short of potential GDP. It is easy for the government to predict the value of the MPC prior to any changes in spending or taxes.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:A country is in the midst of a recession with real GDP estimated to be $13.5 billion below potential GDP. The government's policy
analysts believe the current value of the marginal propensity to consume (MPC) is 0.90.
Instructions: Enter numbers rounded to two decimal places.
a. If the government wants real GDP to equal potential GDP, it should increase government spending by $[
it could reduce taxes by $[ billion.
billion. Alternatively.
b. Suppose that during the recession, people have become less confident and decide they will only spend 50% of any additional
income. In this case, if the government increases spending by the amount calculated in part a, real GDP will end up (Click to select)
potential GDP by $[
billion.
c. With the same decrease in consumer spending described in part b, if the government decreases taxes by the amount calculated in
part a, then real GDP will end up (Click to select)
potential GDP by $
billion.
d. Given your answers above, what can we conclude?
When the government changes spending or taxes, it is easy to predict the exact impact on real GDP.
If the government overestimates the value of the MPC, then its change in spending or taxes will be too large and real GDP will
exceed potential GDP.
If the government overestimates the value of the MPC, then its change in spending or taxes will be too small and real GDP will
fall short of potential GDP.
It is easy for the government to predict the value of the MPC prior to any changes in spending or taxes.
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