1 The government decreases taxes by $300 million. Given that MPC = 0.9, how much will AD increase or decrease due to the multiplier effects? 2. Suppose the government wants to reduce AD by $300 million. MPC = 0.75. How much should government cut spending to decrease AD by $300 million?

1 The government decreases taxes by $300 million. Given that MPC = 0.9, how much will AD increase or decrease due to the multiplier effects? 2. Suppose the government wants to reduce AD by $300 million. MPC = 0.75. How much should government cut spending to decrease AD by $300 million?

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter18: Debates In Macroeconomics Over The Role And Effects Of Government

Section: Chapter Questions

Problem 1WNG

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Concept explainers

Fiscal Policy and Money Market

Fiscal policy is one of the important tools that is used by the government to control inflation or aggregate demand in the economy. Under this policy, there are two rules which are used by the government, one is the expenditure of the government and the other is the taxation or income of the government which it collects from the public.

Question

1 The government decreases taxes by $300
million. Given that MPC = 0.9, how much will
AD increase or decrease due to the multiplier
effects?
2. Suppose the government wants to reduce AD
by $300 million. MPC = 0.75. How much should
government cut spending to decrease AD by
$300 million?

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