MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 11.A, Problem 2TY
To determine
To describe:The effect on equilibrium
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Suppose that consumption is 70 million and disposable income is 350 and that the economy is experiencing a recessionary gap of 66 million. If the government spent 2 million and taxes were cut by 5 million, what happens to the GDP gap?
based on macroeconomic theory, one of the following four answers is a correct description of the concept, “expenditure multiplier”. Which one?
A/ It is the idea that decreasing national income affects the equilibrium level of GDP by the same amount of that decrease in income.
B/ It is the concept that increasing national income affects the equilibrium level of GDP on par with the amount of increased income.
C/ The expenditure multiplier is the idea that a given change in spending leads to an equal change in the equilibrium level of GDP.
D/ It is the concept that an increase in spending causes a more than proportionate change in GDP.
Write out and explain the GDP and Aggregate Expenditure identity equations.
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- Calculate the net cumulative change in the aggregate expenditure if taxes were cut by $200 billion and MPC is estimated to be .75. What if government expenditure was increased by $200 billion?arrow_forwardWith an MPC of 0.8, government spending increases $20 billion while taxes decrease $10 billion. Based on this data, what is the cumulative effect on GDP?arrow_forwardConsider an economy in which investment is $200, government purchases are $500, net exports are $30, and the price level is fixed. Taxes vary with income, and as a result, the consumption schedule looks like that shown in the following table. Fill in the missing values. Graph the aggregate expenditure graph using the above data. This is the graph with Aggregate Expenditures on the Y axis and Real GDP on the x axis. Start with a forty five degree line. Suppose that full employment comes at GDP=$1,480. Is the economy in an inflationary or recessionary gap? What action would you take to close the gap?arrow_forward
- What is the difference between tax cuts imposed on higher-income households compared with lower- and middle-income households? Discuss the implications for the multiplier and the effectiveness of the tax cuts for boosting GDP.arrow_forwardSuppose the interest on the debt was $700 billion. If interest is paid domestically, 90% will be spent domestically (the remainder is spent on foreign goods). If interest is paid to the foreign sector, only 10% is spent here (the remainder is spent in foreign countries). Every dollar collected in axes to pay the interest cause domestic spending to fall 90 cents. The spending multiplier is 2. d) What is the net impact on GDP if all interest is paid domestically?arrow_forwardsuppose the government wishes to illuminate recessionary of a gdp of 100 billion in the MPC is .075. How much must the government increase in spending? Instead of increasing government spending by the amount you calculated what would be the effect of the government decreasing taxes by this amount explain?arrow_forward
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