20) Using fiscal policy to avoid the recession of 2009. GDP in 2009 was roughly $15,000...
20) Using fiscal policy to avoid the recession of 2009.
GDP in 2009 was roughly $15,000 billion. You learned in Chapter 1 that GDP fell approximately 3 percentage points in 2009. A 3% decrease in GDP is $450 billion.
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If the propensity to consume were 0.7 by how much would government spending have to have increased to prevent a decrease in output?
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If the propensity to consume were 0.7 by how much would taxes have to have cut to prevent any decrease in output? Explain 1 and 2.
Homework Answers
MPC = 0.7
Government spending multiplier = 1/(1-mpc) =
1/(1-0.7)= 3.33
Change in real gdp = multiplier *change in government spending
450 = 3.33* change in government spending
Government spending has to increase by 450/3.33= 135 billion
Tax multiplier = -mpc/(1-mpc) = -0.7/(1-0.7)= -2.33
Change in real gdp =tax multiplier * change in taxes
450 = -2.33 * change in taxes
Taxes has to decrease by 450/2.33= 192.86 billion
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