Homework Answers
MPC = 3/4 = 0.75
Tax multiplier = -MPC / ( 1-MPC) = -0.75/(1-0.75) = -3
A)
Initial effect of tax reduction is a $20 x 0.75 = $15 billion increase in aggregate demand. Total effect of tax cut is $20 x 3 = $60 billion increase in aggregate demand.
B)
Total effect of $20 billion tax cut is lower than effect of $20 billion increase in government purchases.
Reason: This is because government spending multiplier is greater in value than tax multiplier)
C)
Increase taxes and government purchases by the same amount
Reason: Increasing taxes by the same amount of government and made will not disturb the budget deficit
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Attempts: Score: /3 15. Problems and Applications Q8 Suppose the government reduces taxes by $20 billion,...
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