A simple closed economy, with an mpc equal to 0.75. The government has passed a balanced budget amendment. The economy goes into a recession, so the government increases government spending by 40 million to try to expand the economy i. Find the change in output from the increase in government spending. ii. The balanced budget amendment requires the government to also raise taxes by 40 million. Calculate the change in output from the tax hike. iii. What is the net effect on output from these two policies? Was there any expansionary effect?
A simple closed economy, with an mpc equal to 0.75. The government has passed a balanced budget amendment. The economy goes into a recession, so the government increases government spending by 40 million to try to expand the economy i. Find the change in output from the increase in government spending. ii. The balanced budget amendment requires the government to also raise taxes by 40 million. Calculate the change in output from the tax hike. iii. What is the net effect on output from these two policies? Was there any expansionary effect?
Chapter11: Fiscal Policy
Section: Chapter Questions
Problem 5SQP
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A simple closed economy, with an mpc equal to 0.75. The government has passed a balanced budget amendment. The economy goes into a recession, so the government increases government spending by 40 million to try to expand the economy
i. Find the change in output from the increase in government spending.
ii. The balanced budget amendment requires the government to also raise taxes by 40 million. Calculate the change in output from the tax hike.
iii. What is the net effect on output from these two policies? Was there any expansionary effect?
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