Consider a hypothetical closed economy in which the marginal propensity to consume (MPC) is 0.5 and taxes do not vary with income (that is,taxes are fixed rather than variable and the income tax rate t = 0). The following graph shows the aggregate demand curves (AD₁ and AD2), theshort-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A.PRICE LEVEL140Potential GDP136132128124A120116112108400500600AD1AD2AS124700800900 100011001200REAL GDP (Billions of dollars)?The economy is currently experiencing a recessionarygap of $billion.To close this gap, one option would be for the government to decreasenot change).government purchases by $billion (assuming net taxes doIf the government kept its purchases constant, it could also close the gap by cutting ▼ net taxes (taxes minus transfers) by $- MPC(Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is1- MPCbillion.

The marginal propensity to consume (MPC) is a concept in economics that represents the proportion of…

Consider a hypothetical closed economy in which the marginal propensity to consume (MPC) is 0.5 and taxes do not vary with income (that is, taxes are fixed rather than variable and the income tax rate t = 0). The following graph shows the aggregate demand curves (AD₁ and AD2), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. PRICE LEVEL 140 Potential GDP 136 132 128 124 A 120 116 16 112 108 400 500 600 AD 2 AD 700 800 900 AS 124 1000 1100 1200 REAL GDP (Billions of dollars) ? The economy is currently experiencing a recessionary gap of $ billion. To close this gap, one option would be for the government to decrease not change). government purchases by $ billion (assuming net taxes do If the government kept its purchases constant, it could also close the gap by cutting (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is net taxes (taxes minus transfers) by $ MPC .) billion. 1- MPC

Consider a hypothetical closed economy in which the marginal propensity to consume (MPC) is 0.5 and taxes do not vary with income (that is, taxes are fixed rather than variable and the income tax rate t = 0). The following graph shows the aggregate demand curves (AD₁ and AD2), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. PRICE LEVEL 140 Potential GDP 136 132 128 124 A 120 116 16 112 108 400 500 600 AD 2 AD 700 800 900 AS 124 1000 1100 1200 REAL GDP (Billions of dollars) ? The economy is currently experiencing a recessionary gap of $ billion. To close this gap, one option would be for the government to decrease not change). government purchases by $ billion (assuming net taxes do If the government kept its purchases constant, it could also close the gap by cutting (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is net taxes (taxes minus transfers) by $ MPC .) billion. 1- MPC

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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