2. Fiscal Policy options to address a recessionary gap: Suppose the economy's MPC is .75 or 3/4. A. If the government increases spending by $60 billion, what will the cumulative increase in AD be equal to? | B. If the government decreases taxes by $60 billion, what will the cumulative increase in AD be equal to? C. Does a given increase in government spending have greater or less impact on AD than a given decrease in taxes? Why?

Suppose the government, in an effort to avoid an increase in the deficit, votes for a budget neutral tax cut policy. Assume the marginal propensity to consume (MPC) is equal to 0.75 and taxes are cut by $15 billion. Round answers to the nearest billion, and specify decreases as a negative number. By how much will government spending change? change in government spending: $ What is the resulting change in the equilibrium level of real GDP? change in equilibrium level of real GDP: $ billion billion

60. Assume a recessionary gap of $300 B exists in the U.S. macroeconomy. Also assume that the MPC .80. How much do taxes need to change and do the change in taxes represent an increase or a decrease? (Use simple multiplier formula) A. $100 B, increase B. $300 B, increase C. $75 B, decrease D. $62 B, increase

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