Principles of Economics, 7th Edition (MindTap Course List)
Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 34, Problem 7PA

Subpart (a):

To determine

Marginal propensity to consume.

Subpart (b):

To determine

Marginal propensity to consume.

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Suppose economists observe that an increase in government spending of $14 billion raises the total demand for goods and services by $42 billion.   If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be    .   Now suppose the economists allow for crowding out.   Their new estimate of the MPC would be    than their initial one.
3. a) Suppose economists observe that an increase in government spending of 300 crore taka raises the total demand for goods and services to 400 crore taka. If these economists ignore the possibility of crowding out effect, calculate the marginal propensity to consume (MPC)? b) Now suppose economists allow for crowding out. Would their new estimate of the MPC be smaller or larger than your answer to part a, explain.
What is the eventual effect on real GDP if the government increases its purchases of goods and services by $75,000? Assume the marginal propensity to consume (MPC) is 0.75. $     What is the eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $75,000? Assume the MPC has not changed. $     An increase in government transfers or taxes, as opposed to an increase in government purchases of goods and services, will result in an identical eventual effect on real GDP. no change to real GDP. a larger eventual effect on real GDP. a smaller eventual effect on real GDP.
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