Response Questions Part A To D Assume the government purchases decrease by $10 billion, with other...

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Response Questions Part A To D Assume the government purchases decrease by $10 billion, with other factors held constant, inc

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Answer 1

Answer #1

If there is an increase in the government spending.

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=0.8

MPS=1-0.8

=0.2

Spending Multiplier=1/0.2

=5

Since Federal government purchase have decreased by $10 billion.

Decrease in the real GDP= Multiplier* change in G

=5*( $10 billion)

= $50 billion

C

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

d.

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

If there is an increase in taxes

a.

MPC=0.9

MPS=1-0.9

=0.1

Tax Multiplier= -MPC/MPS

= -0.9/0.1

=-9

Since Federal government purchase have increased tax by $10 billion.

Decrease in the real GDP= Multiplier* change in T

= -9*( $10 billion)

= -$90 billion

b.

a.

MPC=0.8

MPS=1-0.8

=0.2

Tax Multiplier= -MPC/MPS

= -0.8/0.2

=-4

Since Federal government purchase have increased tax by $10 billion.

Decrease in the real GDP= Multiplier* change in T

= -4*( $10 billion)

= -$40 billion

c.

MPC=0.75

MPS=1-0.75

=0.25

Tax Multiplier= -MPC/MPS

= -0.75/0.25

=-3

Since Federal government purchase have increased tax by $10 billion.

Decrease in the real GDP= Multiplier* change in T

= -3*( $10 billion)

= -$30 billion

d.

MPC=0.6

MPS=1-0.6

=0.4

Tax Multiplier= -MPC/MPS

= -0.6/0.4

=-1.5

Since Federal government purchase have increased tax by $10 billion.

Decrease in the real GDP= Multiplier* change in T

= -1.5*( $10 billion)

= -$15 billion

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