Question

22. Given the MPC = 75, the initial equilibrium = $20,000, and the target Y= $25,000. a. Calculate the spending multiplier. Calculate the tax multiplier. b. By how much would G have to be increased to reach the target Y? c. By how much would T have to be decreased to reach the target Y? 23. True or False AND explain why: a. If G > T, the government budget is in a deficit. b. A tax cut will decrease equilibrium Y , and a tax increase will increase equilibrium Y. c. If the MPC = 9, the tax multiplier is -9.

help...

Answer 1

22) A) Spending Multiplier = 1/(1-MPC)

Spending Multiplier = 1/(1-0.75) = 1/0.25

Spending Multiplier = 4

Tax Multiplier = -MPC / (1-MPC)

Tax Multiplier = -0.75/(1-0.75) = -0.75/0.25

Tax Multiplier = -3

b) Change in Y = 25000-20000 = 5000

Change in G = Change in Y / Spending Multiplier

Change in G = 5000/4 = 1250$

Hence G has to be increased by 1250$

C) Change in Tax = Change in Y / Tax Multiplier

Change in Tax = 5000/-3 = -1666.67$

Tax has to be reduced by 1666.67$

23)

a) Answer: True

If government spending (G) is greater than. Tax which is revenue than Government is having a budget deficit as they don't have enough revenue.

C) Answer: True

MPC = 0.9

MPS = 1-0.9 = 0.1

Tax Multiplier = -MPC / MPS = -0.9/0.1 = -9