Question

9.Suppose a country's MPC is 0.8, and in this country, government seeks to boost real GDP by either increasing government purchases by $50 billion or by reducing taxes by the same amount. Instructions: Round your answers to one decimal place when appropriate. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. If it increases government purchases, real GDP will increase by $ billion, suggesting an expenditures multiplier of . If the government instead lowers taxes, real GDP will increase by $ billion, suggesting a tax multiplier of . b. Now suppose another country's MPC is 0.6, and in this country, government seeks to reduce real GDP by either decreasing government purchases by $50 billion or by raising taxes by the same amount.

Answer 1

Answer:

MPC= 0.8  

Increment in G or lessening in taxes= $50 billion  

Part A).

If it expands government buys , genuine GDP will increment by (1 / 1 - 0.8) (50 billion) = $250 billion, recommending a use multiplier of 1 / 1 - MPC =  1 / (1 - 0.8) = 1 / 0.2 = 5 .  

In the event that the administration brings down assessments, genuine GDP will increment by (-0.8 / 1 - 0.8) (-50 billion) = $200 billion, proposing a duty multiplier of (-MPC / 1 - MPC) = (-0.8 / 1 - 0.8) = -0.8 / 0.2 = -4.  

Part B)

MPC = 0.6  

Lessening in Government purchase or increment in charges = $50 billion  

In the event that the administration diminishes , genuine GDP will diminish by ( 1 / 1 - 0.6) (50 billion) = $125 billion, recommending a use multiplier of 1 / 1 - MPC = 1 / 1 - 0.6 = 2.5  

On the off chance that the legislature rather raises charges , genuine GDP will diminish by (-0.6 / 1 - 0.6) (-50 billion) = $75 billion, proposing a duty multiplier of (-MPC / 1 - MPC) = (-0.6 / 1 - 0.6) = -1.5

Answer 2

Answer:

a) 1/(1-MPC)

b)  $50 billion increase in taxes will lead to a $75 billion decrease in real GDP ($50 billion × (-1.5).

Explanation:

A)  Expenditure multiplier is stated as 1/(1-MPC) that is marginal propensity to consume or 1/MPS

Example: If it increases government purchases, real GDP will increase by $250 billion, suggesting an expenditures multiplier of 5.

If the government instead lowers taxes, real GDP will increase by $200 billion, suggesting a tax multiplier of (-4).

Expenditures multiplier is already given as 1/(1 - MPC) or 1/MPS. Now, the expenditures multiplier = 1/(1 - 0.8) = 1/0.2 = 5. So a $50 billion increase in government purchases will result in a $250 billion increase in real GDP ($50 billion × 5). The tax multiplier is computed as - MPC/(1 - MPC) or - MPC/MPS. For this economy, the tax multiplier equals (-0.8)/0.2 = (-4). Therefore, a $50 billion decrease in taxes will result in a $200 billion increase in real GDP (-$50 billion × (-4).

B) Expenditures multiplier is stated as 1/(1 - MPC) or 1/MPS again. In this country, the expenditures multiplier = 1/(1 - 0.6) = 1/0.4 = 2.5.

Therefore, $50 billion decrease in government purchases will result in a $125 billion decrease in real GDP ($50 billion × 2.5).

Since we have our tax multiplier is stated as - MPC/(1 - MPC) or - MPC/MPS, the tax multiplier for this economy equals (-0.6)/0.4 = (-1.5).

That is to say a $50 billion increase in taxes will lead to a $75 billion decrease in real GDP ($50 billion × (-1.5).