PRINCIPLES OF MACROECONOMICS (LL)W/ACC.
7th Edition
ISBN: 9781264088980
Author: Frank
Publisher: MCG
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Chapter 13, Problem 13.6CC
To determine
The two ways in which fiscal policy could be used to offset the expansionary output gap with an MPC of 0.5.
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Students have asked these similar questions
Suppose the aggregate expenditure (AE) schedule in an economy is given by the equation AE = 1,000 + 0.8Y, where Y represents the real GDP. The government plans to implement an expansionary fiscal policy by increasing government spending by $200 billion.
Calculate the new equilibrium level of real GDP (Y) if the marginal propensity to consume (MPC) is 0.75.
Given MPC (marginal propensity to consume) = 0.75, if the government implements an expansionary fiscal policy as
(1) cutting taxes by $10 billion, then by how much would total spending increase over an infinite period?
(2) spending $10 billion, then by how much would total spending increase over an infinite period?
Let the marginal propensity to consume for an economy be 0.9 (MPC = 0.9). Policymakers in the
federal government view the economy as "overheating" and want to enact fiscal policy to reduce
AD. This scenario applies questions 31 - 33.
Question 31
If the federal government reduces it purchases, G, by $50 billion, by much will real GDP change
assuming no mitigating factors on the fiscal multiplier?
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Chapter 13 Solutions
PRINCIPLES OF MACROECONOMICS (LL)W/ACC.
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- Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases 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 (AD2) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ by selecting it…arrow_forwardConsider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. 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 increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases 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 .arrow_forwardThe marginal propensity to consume out of permanent income equals 0.9 and the marginal propensity to consume out of transitory income equals 0.1. Suppose that there is an emergency increase in government spending of $200 billion to repair infrastructure. The spending takes place within a year. The spending increase is financed by a one-time increase in taxes. Prior to the increase in government spending, permanent income equals $9,600 billion and transitory income equals zero. (a) Compute the amounts of consumption expenditures and private saving prior to the tax increase. (b) Compute the amount of changes in consumption expenditures and private saving, given that the tax increase lasts for only one year. (c) Compute the initial change in aggregate demand that results from this combination of increases in government spending and taxes.arrow_forward
- Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to This increases 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 and the spending multiplier for this economy 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 (AD2) is parallel to the initial aggregate demand curve (AD1…arrow_forwardIn the economy of Keynesian Island, autonomous consumption expenditure is $50 million, and the marginal propensity to consume is 0.8. Investment is $160 million, government expenditure is $190 million, and net taxes are $250 million. Investment, government purchases, and taxes are constant—they do not vary with income. The island does not trade with the rest of the world. If the government increases its purchases by $200 million, what will be the change in the economy's equilibrium real GDP? Show the change on the graph as well.arrow_forwardConsider an economy in which the marginal propensity to consume is 0.75, prices are constant, G is initially 1,500, taxes are autonomous (not related to income) and are initially 2,000, transfer payments are initially 500, and GDP is initially 8,200. The economy is currently experiencing an inflationary gap. The government wishes to eliminate the gap and intends to reduce GDP to 7,000, and is considering changing government purchases, or taxes, or transfer payments. What new levels of these fiscal policy tools would be needed? In each case, what would the new government surplus or deficit be?arrow_forward
- Suppose the economy begins at full employment and then consumer confidence rises. As a result, the economy is currently experiencing an AD shortfall of $120 billion (AD is 120 below fe) and the MPC=8. What is the appropriate change in Government spending if fiscal policy is used to move the economy back to full employment? a) $24 billion increase in G b) none of the other answers is the appropriate amount of change in G c) $30 billion decrease in G d) $40 billion increase in G e) $120 billion decrease in Garrow_forwardThe marginal propensity to expend is 0.5 and there is a recessionary gap of $200. What fiscal policy would you recommend? (Assume mpe = mpc) 0000 Expansionary fiscal policy; increase government expenditures by $100, or cut taxes by $200. Contractionary fiscal policy; decrease government expenditures by $200, or cut taxes by $100. Contractionary fiscal policy; decrease government expenditures by $100, or cut taxes by $200. Expansionary fiscal policy; increase government expenditures by $200, or cut taxes by $100.arrow_forwardConsider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for the economy is______, and the spending multiplier for the economy is______. suppose the government in this economy decides to decrease the government purchases by $300 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 that 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 (AD2) is parallel…arrow_forward
- 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…arrow_forwardAn economy is operating with an output that is $400 billion dollars below its natural rate of $2000 billion dollars and fiscal policy makers want to close the recessionary gap. The central bank agrees to hold the interest rate constant so there is no crowding out. The marginal propensity to consume is 4/5. In which direction and by how much would the government spending need to change to close the gap? Fully explain your answer and provide a graph that shows the initial situationarrow_forwardFill 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) $8,000 $9,000 $10,000 $11,000 $12,000 In the above example, the marginal propensity to consume is (Enter your response rounded to two decimal places.) In the above example, the marginal propensity to save is (Enter your response rounded to two decimal places.) Consumption (C) $4,800 $5,400 $6,000 $6,600 $7,200 Saving (S) $ $arrow_forward
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