Suppose the government, in an effort to avoid an increase in the deficit, votes for a budget neutral tax cut policy. Assume the marginal propensity to consume (MPC) is equal to 0.65 and taxes are cut by $9 billion. Round answers to the nearest billion, and specify decreases as a negative number. By how much will government spending change? change in government spending: $ billion

Suppose the government, in an effort to avoid an increase in the deficit, votes for a budget neutral tax cut policy. Assume the marginal propensity to consume (MPC) is equal to 0.65 and taxes are cut by $9 billion. Round answers to the nearest billion, and specify decreases as a negative number. By how much will government spending change? change in government spending: $ 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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Suppose that real GDP is currently $1.45 trillion, potential GDP is $1.51 trillion, the government purchases multiplier is 2.4, and the tax multiplier is 2. a. Holding other factors constant, government purchases will need to be increased by $ 0.0250 trillion to bring the economy to equilibrium at potential GDP. (Round to four decimal places as needed.) b. Holding other factors constant, taxes have to be cut by $ 0.0300 trillion to bring the economy to equilibrium at potential GDP. (Round to four decimal places as needed.) c. Construct an example of a combination of increased government spending and tax cuts that will bring the economy to equilibrium at potential GDP. The combination of increasing government spending by $0.0600 trillion and cutting taxes by $ trillion will bring the economy to equilibrium at potential GDP (Round to four decimal places as needed.) $0.0600 trillion $0.1440 trillion $0.1200 trillion $0.0100 trillion
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When the unemployment rate increases, the budget: a. is unaffected b. tends to move into deficit c. tends to move into a surplus d. remains neutral If government purchases decrease so the budget may be balanced, some government transfers will automatically increase, reducing the multiplier effect. True False
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