Suppose a country is in the midst of a recession with real GDP estimated to be $13.5 billion below potential GDP. The government's policy analysts beleve the current value of the marginal propensity to consume (MPC) is 0.90. Instructions: If needed, round answers to two decimal places. a. The government spending multiplier is The tax multipler is b. If the government wants to stimulate the economy so that real GDP is to equal potential GDP, It should increase government spending by $ billion. Alternatively, it could reduce taxes by $ billion. c. Suppose that during the recession, people are less confident and end up spending 50% of any additional income and saving the rest. The new value for the MPC is The actual government spending and tax multipliers will be [(Cick to select) the multipliers calculated in part a. If the government increases spending or cuts taxes by the amounts calculated in palt b, real GDP will be (Cick to select) potential GDP after the policy is implemented. annuar abouO uhu is the estimate of the MPC important when determining fiscal policy?

Suppose a country is in the midst of a recession with real GDP estimated to be $13.5 billion below potential GDP. The government's policy analysts beleve the current value of the marginal propensity to consume (MPC) is 0.90. Instructions: If needed, round answers to two decimal places. a. The government spending multiplier is The tax multipler is b. If the government wants to stimulate the economy so that real GDP is to equal potential GDP, It should increase government spending by $ billion. Alternatively, it could reduce taxes by $ billion. c. Suppose that during the recession, people are less confident and end up spending 50% of any additional income and saving the rest. The new value for the MPC is The actual government spending and tax multipliers will be [(Cick to select) the multipliers calculated in part a. If the government increases spending or cuts taxes by the amounts calculated in palt b, real GDP will be (Cick to select) potential GDP after the policy is implemented. annuar abouO uhu is the estimate of the MPC important when determining fiscal policy?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 5DQ

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A country is in the midst of a recession with a real GDP estimated to be $1.8 million below potential GDP. The governement's policy analyss believe the current value of the marginal propensity to consume (MPC) is 0.90. (Please answer all parts) a. If the government wants real GDP to equal potential GDP, by how much should it increase governement spending? Alternatively, by how much should it reduce taxes? b. Suppose that during the recession people have become less confident and decide they will spend only 50% of any additional income. In this case, if the governement increases spending by the amount calculated in part A, will real GDP end up less than , greater than or equal to potential GDP? by how much? c. With the same decrese in consumer spending as described in part B, if the governement decreases taxes by the amount calculated in part A, will real GDP end up less than, greater than or equal topotential GDP? by how much? d. Why is it difficult for the governement to predict…
Explanation it correctly and details Q)Suppose that economists observe than an increase in government spending of $6 billion raises total demand for goods and services by $16 billion. (a) If these economists ignore the possibility of crowding out, what would they estimate the marginal propensity to consume (MPC) to be? (b) Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than the initial level? Explain your answer.
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