1. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is 0.6 , and the expenditure multiplier for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases income yet again, causing a second change in consumption equal to - . The total change in demand resulting from the initial change in government spending is

1. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is 0.6 , and the expenditure multiplier for this economy is Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases income yet again, causing a second change in consumption equal to - . The total change in demand resulting from the initial change in government spending is

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.4P

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Explain the difference between the government purchases multiplier and the net tax multiplier. If the MPC falls, what happens to the tax multiplier?
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7 Derive multiplier for a change in the government purchase and the taxes. Why is the tax multiplier smaller than the government purchase multiplier?
7) Define the tax multiplier and give the algebraic expression.8) Assume that the government spending multiplier is equal to 4. Calculate the tax multiplier from thisinformation.9) Calculate how much output would expand by if the government increased spending by $500 billion and financedthis spending by increasing lump-sum taxes by the same amount.
1. The government expenditure multiplier is the effect of a change in government expenditure (G) on goods and services: a. An increase in aggregate expenditure increases aggregate demand (AD), which increases real GDP, which induces an increase in consumption expenditure (C), and which further increases aggregate demand (AD). b. An increase in aggregate expenditure increases aggregate supply (AS), which increases real GDP, which induces an increase in consumption expenditure (C), and which further increases aggregate supply (AS). c. An increase in aggregate expenditure decreases aggregate demand (AD), which decreases real GDP, which induces an decrease in consumption expenditure (C), and which further decreases aggregate demand (AD). d. An increase in aggregate expenditure decreases aggregate supply (AS), which decreases real GDP, which induces an decrease in consumption expenditure (C), and which further decreases aggregate supply (AS). 2. How do banks create money? Group of…
1. Suppose that the economy can be described by the following equations: C = 400 + (8/9)*DI I = 300G = 800T = (1/2)*Y (X – M) = 0. a. If national income (Y) increased by $1, by how much would consumption increase? What is the name of this concept?b. Find the equilibrium level of output.c. The budget for this fiscal year increases government spending by $50. i) Sketch the effect of the increase in government spending.ii) Calculate the new equilibrium level of income.iii) Calculate the change in income and compare to the increase in government spending. Comment.iv) Given your numerical answer in part (iii), calculate the change in national income when government spending increases by one dollar.v) Derive the actual value of the fiscal multiplier using an algebraic equation. Compare to part (iv).Now G assumes its original value of G = 800.d. Congress decreases the tax rate from (1/2) to (1/4) i) Sketch the effect of the decrease in the tax rate. ii) Calculate the new equilibrium level of…
5. The multiplier effect of a change in government purchases
4. Why does a reduction in taxes have a smaller multiplier effect than an increase in government spending of an equal amount?
6)Suppose that the MPS = 0.2 and the government is interested in raising the level of output in the economy by$100 billion. Calculate how much the government would have to spend to achieve this objective. 9)Calculate how much output would expand by if the government increased spending by $500 billion and financedthis spending by increasing lump-sum taxes by the same amount.
9)Calculate how much output would expand by if the government increased spending by $500 billion and financed this spending by increasing lump-sum taxes by the same amount.
14. If the tax multiplier is -6 and taxes are reduced by $100 billion, output:(A) falls by $100 billion. (B) falls by $600 billion. (C) increases by $600 billion.(D) increases by $100 billion.
1. (Fiscal Policy) Define fiscal policy. Determine whether each of the following, other factors held constant, would, in the short run, lead to an increase, a decrease, or no change in the level of real GDP demanded: a. A decrease in government purchases b. An increase in net taxes c. A reduction in transfer payments d. A decrease in the marginal propensity to consume 2. (Fiscal Multipliers) Explain the difference between the government purchases multiplier and the net tax multiplier. If the MPC falls, what happens to the tax multiplier? 3. (Multipliers) Suppose investment, in addition to having an autonomous component, also has a component that varies directly with the level of real GDP. How would this affect the size of the spending multiplier? 4. (Fiscal Policy) Chapter 11 shows that increased government purchases, with taxes held constant, can eliminate a recessionary gap. How could a tax cut achieve the same result? 5. (Evolution of Fiscal Policy) What did classical economists…