Question

Gregory Mankiw, Macroecomomics (10th)

Chapter 3: Problems and Applications #8, 10, 11

8. The government raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts? a. Public saving b. Private saving c. National saving d. Investment

Answer 1

Given that public saving public savings are given by the difference between taxes and government spending when tax increase public savings will also increase by the same amount Therefore public saving rise by $100 billion private saving It is given that the Mpc is 0.6 That means with an increase in taxes by $100 billion consumption will fall by 0.6 times $100 billion - $60 billion Now calculate the change in private savings as Follows Change in private savings = Income - Taxes - consumption as income does change \r\n = Change in taxes - change in consumption = -$100 billion - ($60 billion) = -$40 billion Therefore Saving will fall by $40 billion National saving Therefore private saving will Fall by $40 billion calculate the national saving as Follows National savings = Public saving + private saving = $100 billion - $40 billion = $60 billion There fore national saving will rise by $60 billion