9 February, 10:48

# 9. Suppose a country's MPC is 0.8, and in this country, government seeks to boost real GDP by either increasing government purchases by \$50 billion or by reducing taxes by the same amount. Instructions: Round your answers to one decimal place when appropriate. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. If it increases government purchases, real GDP will increase by \$ billion, suggesting an expenditures multiplier of. If the government instead lowers taxes, real GDP will increase by \$ billion, suggesting a tax multiplier of. b. Now suppose another country's MPC is 0.6, and in this country, government seeks to reduce real GDP by either decreasing government purchases by \$50 billion or by raising taxes by the same amount.

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1. 9 February, 11:36
0
MPC = 0.8

Increment in G or lessening in taxes = \$50 billion

Part A).

If it expands government buys, genuine GDP will increment by (1 / 1 - 0.8) (50 billion) = \$250 billion, recommending a use multiplier of 1 / 1 - MPC = 1 / (1 - 0.8) = 1 / 0.2 = 5.

In the event that the administration brings down assessments, genuine GDP will increment by (-0.8 / 1 - 0.8) (-50 billion) = \$200 billion, proposing a duty multiplier of (-MPC / 1 - MPC) = (-0.8 / 1 - 0.8) = - 0.8 / 0.2 = - 4.

Part B)

MPC = 0.6

Lessening in Government purchase or increment in charges = \$50 billion

In the event that the administration diminishes, genuine GDP will diminish by (1 / 1 - 0.6) (50 billion) = \$125 billion, recommending a use multiplier of 1 / 1 - MPC = 1 / 1 - 0.6 = 2.5

On the off chance that the legislature rather raises charges, genuine GDP will diminish by (-0.6 / 1 - 0.6) (-50 billion) = \$75 billion, proposing a duty multiplier of (-MPC / 1 - MPC) = (-0.6 / 1 - 0.6) = - 1.5
2. 9 February, 12:34
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a) 1 / (1-MPC)

b) \$50 billion increase in taxes will lead to a \$75 billion decrease in real GDP (\$50 billion * (-1.5).

Explanation:

A) Expenditure multiplier is stated as 1 / (1-MPC) that is marginal propensity to consume or 1/MPS

Example: If it increases government purchases, real GDP will increase by \$250 billion, suggesting an expenditures multiplier of 5.

If the government instead lowers taxes, real GDP will increase by \$200 billion, suggesting a tax multiplier of (-4).

Expenditures multiplier is already given as 1 / (1 - MPC) or 1/MPS. Now, the expenditures multiplier = 1 / (1 - 0.8) = 1/0.2 = 5. So a \$50 billion increase in government purchases will result in a \$250 billion increase in real GDP (\$50 billion * 5). The tax multiplier is computed as - MPC / (1 - MPC) or - MPC/MPS. For this economy, the tax multiplier equals (-0.8) / 0.2 = (-4). Therefore, a \$50 billion decrease in taxes will result in a \$200 billion increase in real GDP (-\$50 billion * (-4).

B) Expenditures multiplier is stated as 1 / (1 - MPC) or 1/MPS again. In this country, the expenditures multiplier = 1 / (1 - 0.6) = 1/0.4 = 2.5.

Therefore, \$50 billion decrease in government purchases will result in a \$125 billion decrease in real GDP (\$50 billion * 2.5).

Since we have our tax multiplier is stated as - MPC / (1 - MPC) or - MPC/MPS, the tax multiplier for this economy equals (-0.6) / 0.4 = (-1.5).

That is to say a \$50 billion increase in taxes will lead to a \$75 billion decrease in real GDP (\$50 billion * (-1.5).