Question

#6 Consider an economy that is operating at the full-employment level of real GDP with MPC=0.7 MPC=0.7 . The short-run effect on equilibrium real GDP of a $50 billion increase in government spending ( G G ), balanced by a $50 billion increase in taxes, is...…………. abillion (Increase or Decrease) in real GDP.

#7

Suppose that the MPC in a country is 0.9.

Complete the following table by calculating the change in GDP predicted by the multiplier process given each fiscal policy change listed.

#8

In the following table, indicate whether each fiscal policy action is a discretionary change or an automatic stabilizer.

Fiscal Policy Action	Discretionary Change	Automatic Stabilizer
Increased spending on road construction during a recession
Decreased unemployment compensation during an economic recovery
Increased Medicaid spending during a recession
Increased welfare spending during a recession

Business cycles tend to budget surpluses during periods of growth and budget deficits during recessions.

Fiscal Policy Change	Resulting Change in GDP
	(Billions of dollars)
$100 billion increase in government spending (G)
$100 billion decrease in taxes (T)
$100 billion increase in government spending (G) and $100 billion increase in taxes (T)

Answer 1

(#6)

When G and T increase by the same amount,

Net increase in GDP = G = T = $50 billion increase

(#7)

MPC = 0.9

Spending multiplier = 1 / (1 - MPC) = 1 / (1 - 0.9) = 1/0.1 = 10

Tax multiplier = - MPC / (1 - MPC) = - 0.9/0.1 = - 9

(a) G = $100 billion means Change in Y = G x 10 = $100 billion x 10 = $1,000 billion

(b) T = - $100 billion means Change in Y = T x -9 = (- $100 billion) x (-9) = - $900 billion

(c) G = T = $100 billion means Change in Y = G = T = $100 billion

NOTE: As HOMEWORKLIB Answering Policy, 1st 2 questions are answered.