4. Explain the effect of a discretionary cut in taxes of $40 billion on the economy when the economy's MPC is .60. How does this discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion? (Answer this question by filling and circling answers below.) A tax cut of $40 billion will result in initial increase in consumption of $ $ MPC=MPS). Then .40 × $40 = $__ billion). This initial increase in spending will ultimately result in an increase in consumption spending of $_ billion. (Note that Bil. is saved based on marginal propensity to save (MPS), that is .40 (because 1- billion because of the multiplier process. In contrast, an initial increase in government spending of $40 billion will ultimately increase consumer spending by $ savings as would be the case with a $40 billion tax cut. billion because none of the initial increase is siphoned off as Now you can tell how the discretionary increase in government spending has increased consumer spending of $100 billion compared to the tax cut that increased consumer spending by $billion. We conclude that the direct government spending is ( more, less ) effective to increase consumer spending than the tax-cut.

4. Explain the effect of a discretionary cut in taxes of $40 billion on the economy when the economy's MPC is .60. How does this discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion? (Answer this question by filling and circling answers below.) A tax cut of $40 billion will result in initial increase in consumption of $ $ MPC=MPS). Then .40 × $40 = $__ billion). This initial increase in spending will ultimately result in an increase in consumption spending of $_ billion. (Note that Bil. is saved based on marginal propensity to save (MPS), that is .40 (because 1- billion because of the multiplier process. In contrast, an initial increase in government spending of $40 billion will ultimately increase consumer spending by $ savings as would be the case with a $40 billion tax cut. billion because none of the initial increase is siphoned off as Now you can tell how the discretionary increase in government spending has increased consumer spending of $100 billion compared to the tax cut that increased consumer spending by $billion. We conclude that the direct government spending is ( more, less ) effective to increase consumer spending than the tax-cut.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

Problem 6PA

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Similar questions

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