Illustrate the impact of a $500 million increase in government spending by adjusting the graph. In the full Keynesian model, the marginal propensity to save (MPS) is 0.25. Aggregate expenditure (in millions of dollars)Aggregate income = real GDP (in millions of dollars)AE = AIC+I+G+X−M What is the resulting change in output? Output decreases by $2,000 million, or $2 billion. Output increases by $500 million×1.33$500 million×1.33 , or $666.6 million. Output decreases by $500 million×1.33$500 million×1.33 , or $666.6 million. Output increases by $2,000 million, or $2 billion. If the government cut taxes by $500 million instead, what would be the resulting change in output? Output decreases by $1,500 million, or $1.5 billion. Output increases by $666.6 million. Output increases by $1,500 million, or $1.5 billion. Output decreases by $500 million×0.25$500 million×0.25 , or $125 million
Illustrate the impact of a $500 million increase in government spending by adjusting the graph. In the full Keynesian model, the marginal propensity to save (MPS) is 0.25. Aggregate expenditure (in millions of dollars)Aggregate income = real GDP (in millions of dollars)AE = AIC+I+G+X−M What is the resulting change in output? Output decreases by $2,000 million, or $2 billion. Output increases by $500 million×1.33$500 million×1.33 , or $666.6 million. Output decreases by $500 million×1.33$500 million×1.33 , or $666.6 million. Output increases by $2,000 million, or $2 billion. If the government cut taxes by $500 million instead, what would be the resulting change in output? Output decreases by $1,500 million, or $1.5 billion. Output increases by $666.6 million. Output increases by $1,500 million, or $1.5 billion. Output decreases by $500 million×0.25$500 million×0.25 , or $125 million
Chapter21: Fiscal Policy
Section: Chapter Questions
Problem 20SQ
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Illustrate the impact of a $500 million increase in government spending by adjusting the graph. In the full Keynesian model, the marginal propensity to save (MPS) is 0.25.
Aggregate expenditure (in millions of dollars)Aggregate income = real GDP (in millions of dollars)AE = AIC+I+G+X−M
What is the resulting change in output?
Output decreases by $2,000 million, or $2 billion.
Output increases by $500 million×1.33$500 million×1.33 , or $666.6 million.
Output decreases by $500 million×1.33$500 million×1.33 , or $666.6 million.
Output increases by $2,000 million, or $2 billion.
If the government cut taxes by $500 million instead, what would be the resulting change in output?
Output decreases by $1,500 million, or $1.5 billion.
Output increases by $666.6 million.
Output increases by $1,500 million, or $1.5 billion.
Output decreases by $500 million×0.25$500 million×0.25 , or $125 million.
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