Suppose that the economy is experiencing a recession with an estimated recessionary gap of $30 billion. Congress is considering the use of fiscal policy to ease the recession, but due to current political sentiments, it has determined that the maximum spending increase the government is willing to support is $6 billion. It wants to make up the remainder of the recessionary gap using tax cuts. If a spending increase of $6 billion is approved and the MPC is 0.6, by how much will taxes need to be reduced to close the remainder of the recessionary gap? Instructions: Round your answer to 2 decimal places. $ billion

Suppose that the economy is experiencing a recession with an estimated recessionary gap of $30 billion. Congress is considering the use of fiscal policy to ease the recession, but due to current political sentiments, it has determined that the maximum spending increase the government is willing to support is $6 billion. It wants to make up the remainder of the recessionary gap using tax cuts. If a spending increase of $6 billion is approved and the MPC is 0.6, by how much will taxes need to be reduced to close the remainder of the recessionary gap? Instructions: Round your answer to 2 decimal places. $ billion

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The marginal propensity to consume (MPC) for this economy is and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to This decreases income yet again, causing a second change in consumption equal to . The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD 2) is parallel to the initial aggregate demand curve…
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