Question

the marginal propensity to consume is 0.80, how much would government spending have to rise to increase output by $10,000 billion? AGE$ 2,000 billion. (Enter your response as an integer.) How much will taxes need to decrease to increase output by $10,000 billion? AT=$ billion. (Enter your response as an integer)

Answer 1

Answer
Govenment spending multiplier =1/(1-MPC)
=1/(1-0.8)
=5
required change in G=change in output /multiplier =10000/5=2000 billion
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tax multiplier =-MPC/(1-MPC)
=-0.8/(1-0.8)
=-4
required change in tax =change in output /multiplier
=10000/(-4)
=-2500
=cut of $2500 billion
the tax should be cut by $2500 billion to increase output by $10000 billion