Provide solutions to all parts..... 6. The Great Recession of 2008 was a period of high unemployment. Expansionary fiscal policy was called for. President Obama answered with a mix of government spending (G) andtax cuts (T). Some economists argued that Obama was too timid in not pushing for more government spending. Others argued that he should have relied more on tax cuts. Whowas right? After having completed this course you have the tools, and with a little algebra, to answer the question. Solve the following problems to decide who was right (Data in$Billions):Part a: Starting PointLet's make it easy and assume Xn = 0, so Y = C +I+ G, BUT let's add taxes (T), so that consumption is determined by income (Y) after taxes (T) SO in the consumption formula C = a+b(Y-T)C = 20 + 90(Y-T)| = 10G = 10Xn = 0Let's assume taxes = 10, so we have a balanced budget G = TSolve for Y (equilibrium GDP)Part b: Option #1 Raise GSuppose in response to a recession G rises by 5 and T stays the same so now G = 15 and T = 10Solve for Y (equilibrium GDP) using only the mpc and the multiplier.Part c: Option #2 Lower TInstead of Option 1, suppose in response to a recession T falls by 5 and G stays the same so that now T = 5 and G = 10.Solve for Y (equilibrium GDP) using only the mpc and the multiplier.Which policy (Option 1 or 2) is more expansionary and why?

In economics, the marginal propensity to consume (MPC) is defined as the proportion of an aggregate…

C = 20 +.90(Y-T) |= 10 G= 10 Xn = 0 Let's assume taxes = 10, so we have a balanced budget G =T Solve for Y (equilibrium GDP) Part b: Option #1 Raise G Suppose in response to a recession G rises by 5 and T stays the same so now G = 15 and T = 10 Solve for Y (equilibrium GDP) using only the mpc and the multiplier. Part c: Option #2 Lower T Instead of Option 1, suppose in response to a recession T falls by 5 and G stays the same so that nowT= 5 and G = 10. Solve for Y (equilibrium GDP) using only the mpc and the multiplier.

C = 20 +.90(Y-T) |= 10 G= 10 Xn = 0 Let's assume taxes = 10, so we have a balanced budget G =T Solve for Y (equilibrium GDP) Part b: Option #1 Raise G Suppose in response to a recession G rises by 5 and T stays the same so now G = 15 and T = 10 Solve for Y (equilibrium GDP) using only the mpc and the multiplier. Part c: Option #2 Lower T Instead of Option 1, suppose in response to a recession T falls by 5 and G stays the same so that nowT= 5 and G = 10. Solve for Y (equilibrium GDP) using only the mpc and the multiplier.

Economics Today and Tomorrow, Student Edition

1st Edition

ISBN:9780078747663

Author:McGraw-Hill

Publisher:McGraw-Hill

Chapter17: Stabilizing The National Economy

Section: Chapter Questions

Problem 23AA

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