Assume the economy can be described by the consumption function C = $300 billion + 0.9Y
1. Given the consumption function provided, the cumulative change in total spending if the government increases purchases of goods and services by $100 million will be:
a. |
$100 million |
|
b. |
$80 million |
|
c. |
$ 5 billion |
|
d. |
$1 billion |
2.
Given the consumption function provided, the cululative change in total spending if the government reduces taxes by $100 million will be:
a. |
$90 million |
|
b. |
$900 million |
|
c. |
$50 million |
|
d. |
$100 million |
1) MPC=change in C/change in Y=0.9
Govt. Spending multiplier=1/1-mpc=1/1-0.9=10
change in Aggregate spending=10*100=1000million=1billion.
ans is D
2)tax multiplier =-mpc/1-mpc=-0.9/1-0.9=-9
If taxes decreases by 100million then spending increases by 900million
ans is B
Assume the economy can be described by the consumption function C = $300 billion + 0.9Y...
Consumption Function: C=$300 Billion + 0.9Y The cumulative change in total spending if the government increases purchases of goods and services by $100 million AND at the same time increases taxes by $100 million will be: a. $0 b. $100 million c. $90 million d. $1 billion
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