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30 August, 08:48

If the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4, and government spending increases by $2 billion at the same time taxes rise by $2 billion, equilibrium income will:

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Answers (2)
  1. 30 August, 09:05
    0
    increase by $2 billion

    Explanation:

    If the government increases both spending and taxes by the same amount, equilibrium income will increase by the amount of the government spending which will result in an increase in total aggregate demand.

    If we follow a Keynesian analysis, we can determine the net effect:

    change produced by government spending increase = change G / G multiplier = $2 / 0.4 = $5 billion

    G multiplier = 1 - MPC or MPS

    the change produced by taxes = - (MPC x change T) / MPS = - (0.6 x $2 billion) / 0.4 = - $1.2 billion / 0.4 = - $3 billion

    net effect = $5 billion - $3 billion = $2 billion
  2. 30 August, 10:24
    0
    Answer: Equilibrium income will increase by $800 million

    Explanation:

    When taxes rises means tax rate increased, an increase in tax rate decreases consumption and income. Increase in Government spending increases income

    the increase Government Spending by $2 Billion will increase income by $2 Billion. An increase in taxes will decrease Consumption by $1.2 Billion ($2 billion x 0.6)

    Equilibrium income will increase by $800 million (2 billion - 1.2 billion)
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