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 s billion, whereas a $1 billion reduction in income tax will result in a total increase of aggregate demand by billion.

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 s billion, whereas a $1 billion reduction in income tax will result in a total increase of aggregate demand by billion.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Given that the maginal propensity to consume (MPC) is 0.50, what is the change in equilibrium output (or aggregate demand), if there is a tax is reduced by 50? Hint: Use the tax multiplier formula. -50 -25 50 25
Assume a closed economy in which disposable income starts at 1,000 and increases by 500; consumption starts at 1,100 and increases by 300; investment spending is 1,000 and government spending is 500. 1. The marginal propensity to consume (MPC) is equal to: 0.5 0.6 0.7 6 2. The multiplier is: 0.25 2 2.5 3 3.The consumption equation is: C = 500 + 0.6DI C = 500 + 0.5DI C = 100 + 0.75DI C = 100 + 0.6DI 4. Let ∆I = 1,000. What is the new equilibrium GDP" 7,000 7,500 2,000 8,500
Suppose the marginal propensity to consume is equal to 0.4. If the government lowers tax rates and tax revenue falls by $50 billion, then disposable income will increase by________ billion and consumption spending will initially increase by ________ billion (before the multiplier effect kicks in).
Suppose actual real GDP is $5.49 trillion, potential real GDP is $12.48 trillion, and the marginal propensity to consume is 0.76. If we ignore price effects, and if the government already decided to increase its spending by $1.07 trillion, by how many trillions of dollars should the government change its lump sum taxes to fix the gap? (Round this to two digits after the decimal and enter this value as either a positive value or a negative value without the dollar sign.)
Assume that marginal propensity to consume (MPC) is 73% and the full employment output (Real GDP) is $500 million. If the current actual Real GDP is at $300 million,. government spending by would bring the economy to full employment Real GDP output. a) increasing; $740,000,000 b) increasing: $135, 135, 135.1, c) decreasing; $ 54,054,054.05 d) increasing: $54,054,054.05
Fill in the missing blanks in the following table. Assume for simplicity that taxes are zero. Also assume that the values represent billions of dollars. National Income and Real GDP (Y) $12,000 $13,000 $14,000 $15,000 $16,000 In the above example, the marginal propensity to consume is In the above example, the marginal propensity to save is Consumption (C) $9,600 $10,400 $11,200 $12,000 $12,800 Saving (S) $ $ (Enter your response rounded to two decimal places.) (Enter your response rounded to two decimal places.) GA $ $ $