Suppose an economy is initially in equilibrium at its potential output level. As a result of an unexpected crisis in the financial markets, the AD curve suddenly shift to the left by a horizontal distance equal to $140 billion. Suppose the government has decided to restore the economy to its initial level of output by simultaneously increasing its spending and increasing taxes (so that it does not run into a deficit). Assuming the marginal propensity to consume in this economy is 0.25, by how much must the government increase its spending (and taxes) to achieve its goal? (Calculate your answer in billions of CAD, round it to one decimal places, and write it without units. E.g., write 1.0 for $1 billion.)

Suppose an economy is initially in equilibrium at its potential output level. As a result of an unexpected crisis in the financial markets, the AD curve suddenly shift to the left by a horizontal distance equal to $140 billion. Suppose the government has decided to restore the economy to its initial level of output by simultaneously increasing its spending and increasing taxes (so that it does not run into a deficit). Assuming the marginal propensity to consume in this economy is 0.25, by how much must the government increase its spending (and taxes) to achieve its goal? (Calculate your answer in billions of CAD, round it to one decimal places, and write it without units. E.g., write 1.0 for $1 billion.)

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter21: Fiscal Policy

Section: Chapter Questions

Problem 20SQ

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