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Chapter 13: Q.2 - Problems (page 302)

Assume that MPC= 45when answering the following questions.

a. If government expenditures rise by \( 2 billion, by how much will the aggregate expenditure curve shift upward? By how much will equilibrium real GDP per year change?

b. If taxes increase by \) 2 billion, by how much will the aggregate expenditure curve shift downward? By how much will equilibrium real GDP per year change?

Short Answer

Expert verified

a. by$10trillion

b. by$8billion

Step by step solution

01

introduction

Tax multiplier addresses sway on Real Output because of progress in the Tax rate.

Government Multiplier addresses change in Real GDP because of progress in Government Expenditure

02

explanation part (a)

Given,

MPC = 45

Change in government expenditures role="math" localid="1651984325430" ∆G=$2billion

we know, ΔYΔG=11-MPC

ΔY2=11-0.8=10

equilibrium real GDP per year will change by$10trillion

03

explanation part (b)

Increase in the taxes = $2billion

MPC= 0.8

now

MPS=1−MPCMPS=1=0.8MPS=0.2

Tax multiplier =

△Y△T=−MPCMPS

ΔY2=−0.80.2=−4

role="math" localid="1651985298350" ⇒△Y=−8

equilibrium real GDP per year changes by$8billion

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Most popular questions from this chapter

If a government agency decided to fund the construction of a private hospital in an area in which other private hospitals already are just breaking even, why might one of the other private hospitals cancel plans to expand the size of its facility?

2. Why do you suppose that some economists have argued that a key determinant of a nation's stabilization coefficient value is whether its government relies to a greater extent on automatic fiscal stabilizers instead of discretionary policy actions?

Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. What might account for this outcome?

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Determine whether each of the following is an example of a situation in which a direct expenditure offset to fiscal policy occurs.

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b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending.

c. The government finances the construction of a classical music museum that otherwise would never have received private funding.
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