Question

18. Microland, an imaginary nation, has an MPS of 0.3.Ceteris Paribus, an increase in transfer payments of $50 million for this economy leads to a change in income amounting to $21.4 million. b. S116.6 million. $71.4 million. d. S115 million. 19. Assuming an MPS of 0.2 and a tax rate of 0.2 for an economy. Holding other factors constant, when government expenditures increase by $10 billion, the total change in aggregate output is about SI2 billion. b. $21.7 billion $20.7 billion. $27.7 billion.

Answer 1

18) because marginal propensity to save is 0.3, multiplier is MPC/MPS or 0.7 / 0.3 = 7/3. if there is an increase in transfer payment by 50 , GDP will increase by 50*7/3 = 116.66. select option B

19) spending multiplier in this case = 1/(1-0.8*(0.8)) = 25/9. Government expenditure is increased by 10 which means GDP will increase by 10*25/9 = 27.7. select option D