In economics, the multiplier effect refers to the fact that when there is an injection of money to consumers, the consumers spend a certain percentage of it. That amount recirculates through the economy and adds additional income, which comes back to the consumers and of which they spend the same percentage. This process repeats indefinitely, circulating additional money through the economy. Suppose that in order to stimulate the economy, the government institutes a tax cut of $16 billion. If taxpayers are known to save 7% of any additional money they receive, and to spend 93%, how much total money (T) will be circulated through the economy by that single $16 billion tax cut? (Enter your answer rounded to the nearest whole number.) T≈ billion dollars

In economics, the multiplier effect refers to the fact that when there is an injection of money to consumers, the consumers spend a certain percentage of it. That amount recirculates through the economy and adds additional income, which comes back to the consumers and of which they spend the same percentage. This process repeats indefinitely, circulating additional money through the economy. Suppose that in order to stimulate the economy, the government institutes a tax cut of $16 billion. If taxpayers are known to save 7% of any additional money they receive, and to spend 93%, how much total money (T) will be circulated through the economy by that single $16 billion tax cut? (Enter your answer rounded to the nearest whole number.) T≈ billion dollars

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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
Q)Imagine the government wants to conduct an expansionary fiscal policy and needs an expert to answer the following questions before making a decision. a) Calculate the value of the multiplier effect if the marginal propensity to consume is 0.8. b) Calculate the increase in GDP which will occur, if the government increases its government spending by $600 million and the marginal propensity to consume is 0.8.
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).
If the Marginal Propensity to Consume is 0.9, this means that For each $1 increase in income, residents will increase their consumption by 10 cents. For each $2 increase in government purchase, spending in the economy will increase by $9.00. For each $2 increase in income, residents will increase their savings by 90 cents. For each $2 increase in taxes, spending in the economy will decrease by $18.00. For each $2 increase in government purchase, spending in the economy will increase by $16.00.
How does an increase in tax influence the size of the multiplier
A company is growing rapidly, and is investing nearly all of its income, so its marginal propensity to consume (MPC) is 0.85. Remembering that MPC + MPS equals 1, we find out that the MPS is 0.15. What is the spending multiplier in this case?
The economy of Bananaland can be characterized by Equation 9.3. EQUATION 9.3: C = 2,000 + 0.75Yd T = 200 G = 400 I = 500 Calculate the government spending multiplier.
You are given the following information for the economy of Datalink: C = 250 + 0.85Yd T = 150 + 0.5Y I = 280 G = 400 X = 600 M = 100 - 0.125Y Determine the equilibrium level of income. What is the value of the multiplier? What is the level of consumption, government revenue and imports at the equilibrium level of income? If the government wishes to increase the equilibrium level of income by 200 to close a deflationary gap, by how much must government spending rise to achieve this? What is the government’s budget stance? Produce a sketch of your answers in (i) and (iv) above. Assume that this hypothetical economy is experiencing a severe recession, by how much would government spending have to increase to shift the aggregate demand curve rightward by GH¢ 2500. How large a tax cut would be needed to achieve this same increase in equilibrium income? Why does the tax cut not have the same effect as the increase in government spending?
Theoretically, a decline in G such as the one in the first question leads to a change in equilibrium Y, Ye. First, give the simple equation for how much a change in autonomous government spending changes Ye. Second, we expect that the fall in G will lead to a fall in Ye that is even greater in dollars than the change in G and this will be due to the multiplier effect. Please explain how this multiplier effect (not the multiplier itself but rather the process that shows how spending ripples down through the economy) where a rise in G of $100 billion leads to a change in Ye of more than $100 billion. Once done, answer the following: if the size of the MPS rises as people become more concerned about the possible coming recession what will happen to the amount by which Ye changes with a given rise in G? Explain in words why this change makes sense.
Initially, the economy is producing $13 trillion in goods and services and the government is spending $2 trillion.Then the government decides to increase its spending to $2.7 trillion. a) What is the value of the spending multiplier? b) Compute the new equilibrium level of output. Assume that the marginal propensity to consume is 0.7 (MPC=0.7).
Consider an economy in which the marginal propensity to consume is 0.8 and GDP is currently at 12,000. a) The government wishes to increase GDP to 13,000, and it is considering changing only one of its fiscal tools: 1. government purchases 2. taxes 3. transfer payments How much would the government have to change each of these fiscal policy tools to achieve its goal? (Use the simple spending multiplier for this part and below.) b) Suppose instead that the government wishes to reduce GDP to 10,000, and again, it is considering using only one of its three available fiscal policy tools. How much would it change each of these fiscal tools to achieve its goal?
Spending Round by Round Complete the following questions. 1. Assume the MPC is 0.75. What is the value of the multiplier? What is the MPS? What would need to happen to make the multiplier larger? 2. Assume investment spending increases by $20 billion and the MPC is 0.75. Calculate the first through the fourth rounds of spending in the economy. 3. Assume investment spending increases by $20 billion and the MPC is 0.75. Calculate the total change in GDP arising from this increase in investment spending.