Subpart (a):
Government spending multiplier.
Subpart (a):
Explanation of Solution
The government spending multiplier is calculated as follows:
The government spending multiplier is 10.
Concept introduction:
Marginal propensity to save (MPS): The ratio of change in saving when there is a change in disposable income.
Multiplier: Multiplier refers to the ratio of change in the real
Subpart (b):
Government spending multiplier.
Subpart (b):
Explanation of Solution
The government spending multiplier is calculated as follows:
The government spending multiplier is 2.5.
Concept introduction:
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate.
Subpart (c):
Government spending multiplier.
Subpart (c):
Explanation of Solution
The government spending multiplier is calculated as follows:
The government spending multiplier is 4.
Concept introduction:
Marginal propensity to save (MPS): The ratio of change in saving when there is a change in disposable income.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate.
Subpart (d):
Tax multiplier.
Subpart (d):
Explanation of Solution
The tax multiplier is calculated as follows:
The tax spending multiplier is -1.
Concept introduction:
Marginal propensity to consume (MPC): Marginal propensity to consume refers to the sensitivity of change in the consumption level due to the changes occurred in the income level.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate.
Subpart (e):
Tax multiplier.
Subpart (e):
Explanation of Solution
The tax multiplier is calculated as follows:
The tax spending multiplier is -4.
Concept introduction:
Marginal propensity to save (MPS): The ratio of change in saving when there is a change in disposable income.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate.
Subpart (f):
Tax multiplier.
Subpart (f):
Explanation of Solution
The MPS is calculated as follows:
The MPS is 0.125.
The tax multiplier is calculated as follows:
The tax spending multiplier is -7.
Concept introduction:
Marginal propensity to save (MPS): The ratio of change in saving when there is a change in disposable income.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate.
Subpart (g):
Government spending multiplier.
Subpart (g):
Explanation of Solution
The MPS is calculated using tax multiplier as follows:
MPS is 0.167.
The government spending multiplier is calculated as follows:
The government spending multiplier is 6.
Concept introduction:
Marginal propensity to save (MPS): The ratio of change in saving when there is a change in disposable income.
Multiplier: Multiplier refers to the ratio of change in the real GDP to the change in initial consumption at constant price rate.
Subpart (h):
Applying balanced budget multiplier.
Subpart (h):
Explanation of Solution
If government purchases and taxes increases by $500 billion simultaneously, the output also increases by $500 billion since the balanced budget multiplier effect of 1 is applicable in this case.
Concept introduction:
Balanced Budget Multiplier: Balanced Budget Multiplier refers to the ratio of change in the equilibrium GDP to the change in government spending where the government spend is offset by change in taxes.
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Chapter 9 Solutions
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