14. The economy is experiencing a $225 million inflationary gap. If the government2 decided to solve this macroeconomic disequilibrium using a change in taxes, would you recommend an increase or decrease in taxes? If the MPC = 0.9, what magnitude of tax change would be appropriate?

14. The economy is experiencing a $225 million inflationary gap. If the government2 decided to solve this macroeconomic disequilibrium using a change in taxes, would you recommend an increase or decrease in taxes? If the MPC = 0.9, what magnitude of tax change would be appropriate?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 7PA

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Question

14. The economy is experiencing a $225 million inflationary gap. If the government 02
decided to solve this macroeconomic disequilibrium using a change in taxes, would
you recommend an increase or decrease in taxes? If the MPC=0.9, what magnitude
of tax change would be appropriate?

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Explanation it correctly and details Q)Suppose that economists observe than an increase in government spending of $6 billion raises total demand for goods and services by $16 billion. (a) If these economists ignore the possibility of crowding out, what would they estimate the marginal propensity to consume (MPC) to be? (b) Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than the initial level? Explain your answer.