6. The multiplier effect of a change in government purchasesConsider 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 isand the spending multiplier for this economy is1Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead toan increase in income, generating an initial change in consumption equal to▼ . This increases income yet again, causing a secondchange in consumption equal toThe total change in demand resulting from the initial change in government spendingisThe following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending.Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the multiplier effect takes place. For simplicity, assume thatthere is no "crowding out."Hint: Be sure that the new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD₁). You can see the slope of AD₁ byselecting it on the graph. PRICE LEVEL1401351301251201151101051000AD₁23456OUTPUT (Trillions of dollars)7 8AD2?

Marginal propensity to consume is the proportion of the disposable income that a person wants to…

ent in this economy decides to increase government purchases by $400 billion. The increase in govern generating an initial change in consumption equal to . This increases income yet a equal to . The total change in demand resulting from the initial change in governn ows the aggregate demand curve (AD₁) for this economy before the change in government spending angle symbol) to plot the new aggregate demand curve (AD₂) after the multiplier effect takes place. Out." new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD₁). You can

ent in this economy decides to increase government purchases by $400 billion. The increase in govern generating an initial change in consumption equal to . This increases income yet a equal to . The total change in demand resulting from the initial change in governn ows the aggregate demand curve (AD₁) for this economy before the change in government spending angle symbol) to plot the new aggregate demand curve (AD₂) after the multiplier effect takes place. Out." new aggregate demand curve (AD₂) is parallel to the initial aggregate demand curve (AD₁). You can

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?
5. The multiplier effect of a change in government purchases
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…
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.
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.
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.
7 Derive multiplier for a change in the government purchase and the taxes. Why is the tax multiplier smaller than the government purchase multiplier?
1. Calculate GDP loss if equilibrium level of GDP is $8,000, unemployment rate 8.8%, and the MPC is 0.80. Hint: (Use Okun's law to calculate GDP loss) a) How much money should the government spend to eliminate this GDP loss? b) Calculate the tax cut needed to eliminate this GDP loss. 2. Calculate MPC, MPS and the Multiplier if consumption expenditure increases by $4,000 as a result of increase in income from $40,000 to $46,000. 3. Assume that initially G is $300 and equilibrium real GDP is $5000. If the multiplier is 5, what would be the new equilibrium level of GDP if Government expenditures increase to $500. This would be all the questions and work to these questions. There's nothing more to it.
1. Calculate GDP loss if equilibrium level of GDP is $8,000, unemployment rate 8.8%, and the MPC is 0.80. Hint: (Use Okun's law to calculate GDP loss) a) How much money should the government spend to eliminate this GDP loss? b) Calculate the tax cut needed to eliminate this GDP loss. 2. Calculate MPC, MPS and the Multiplier if consumption expenditure increases by $4,000 as a result of increase in income from $40,000 to $46,000. 3. Assume that initially G is $300 and equilibrium real GDP is $5000. If the multiplier is 5, what would be the new equilibrium level of GDP if Government expenditures increase to $500.
3@ An economy has neither imports nor income taxes. The MPC is 0.75 and the real GDP is $120 billion. The government increases expenditures by $4 billion. The multiplier is _____ and the change in real GDP from the increase in government expenditures is _____ billion.
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…
4. Why does a reduction in taxes have a smaller multiplier effect than an increase in government spending of an equal amount?