Homework Answers
A.
Demand side economics is a part of macroeconomics and in this there is more focus on the increase in the aggregate demand by increasing spending by the government and another way is to cuts taxes and give subsidy. Hence it increases aggregate demand.
AD=consumption + government expenditure + investment + export - import
Budget deficit is excess of government spending relative to its income through taxes.
It is calculated as = (G-T) where G>T
So demand side economics and budget deficit are positively related. This is because with the increase in budget deficit, the government expenditure will increase and it leads to an increase in AD, so real GDP will also increase.
B.
a.
MPC=0.9
MPS=1-0.9
=0.1
Spending Multiplier=1/0.1
=10
Since Federal government purchase have decreased by $10 billion.
Decrease in the real GDP= Multiplier* change in G
=10*( $10 billion)
= $100 billion
b.
MPC=0.75
MPS=1-0.75
=0.25
Spending Multiplier=1/0.25
=4
Since Federal government purchase have decreased by $10 billion.
Decrease in the real GDP= Multiplier* change in G
=4*( $10 billion)
= $40 billion
c.
MPC=0.6
MPS=1-0.6
=0.4
Spending Multiplier=1/0.4
=2.5
Since Federal government purchase have decreased by $10 billion.
Decrease in the real GDP= Multiplier* change in G
=2.5*( $10 billion)
= $25 billion
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