In the Keynesian model, if the economy is experiencing a recessionary gap of $825 billion and the marginal propensity to save is .20, which one of the following combinations of spending and taxing changes should the government implement in order to eliminate the gap? 1. Increase government spending by $350 billion and decrease taxes by $350 billion. 2. Decrease government spending by $125 billion and increase taxes by $50 billion. 3. Decrease government spending by $250 billion and increase taxes by $150 billion. 4. Increase government spending by $600 billion and decrease taxes by $225 billion. 5. Increase government spending by $100 billion and decrease taxes by $100 billion. 6. Increase government spending by $125 billion and decrease taxes by $50 billion.
In the Keynesian model, if the economy is experiencing a recessionary gap of $825 billion and the marginal propensity to save is .20, which one of the following combinations of spending and taxing changes should the government implement in order to eliminate the gap? 1. Increase government spending by $350 billion and decrease taxes by $350 billion. 2. Decrease government spending by $125 billion and increase taxes by $50 billion. 3. Decrease government spending by $250 billion and increase taxes by $150 billion. 4. Increase government spending by $600 billion and decrease taxes by $225 billion. 5. Increase government spending by $100 billion and decrease taxes by $100 billion. 6. Increase government spending by $125 billion and decrease taxes by $50 billion.
Chapter15: Fiscal Policy
Section: Chapter Questions
Problem 6SQ
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Question
In the Keynesian model, if the economy is experiencing a recessionary gap of $825 billion and the marginal propensity to save is .20, which one of the following combinations of spending and taxing changes should the government implement in order to eliminate the gap?
1. Increase government spending by $350 billion and decrease taxes by $350 billion.
2. Decrease government spending by $125 billion and increase taxes by $50 billion.
3. Decrease government spending by $250 billion and increase taxes by $150 billion.
4. Increase government spending by $600 billion and decrease taxes by $225 billion.
5. Increase government spending by $100 billion and decrease taxes by $100 billion.
6. Increase government spending by $125 billion and decrease taxes by $50 billion.
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