ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Question

where is the 11 comming from? 

Step 1 Given: Estimated recessionary gap = $20 billion Increase in government spending = $1 billion MPC = 0.9 Step 2 Since MPC =0.9, Multiplier-11-MPC =11-0.9 =10.1 =10 Change in national income due to increase in government spending:- =10x1 Change in National Income-MultiplierxAG Remainder of the recessionary gap=20 billion-10 billion = $10 billion Step 3 Tax Multiplier = MPC1 - MPC =0.9/0.1 = 9 Change in Income Tax Multiplier * Change in Taxes Change in Income required = 10 billion Putting in values: =$10 billion 10 billion = 9 * (- Change in Taxes) (Negative Sign is used to denote reduction in taxes) Changes in Taxes = -1.11 billion Therefore, tax needs to be reduced by $1.11 billion.
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Transcribed Image Text:Step 1 Given: Estimated recessionary gap = $20 billion Increase in government spending = $1 billion MPC = 0.9 Step 2 Since MPC =0.9, Multiplier-11-MPC =11-0.9 =10.1 =10 Change in national income due to increase in government spending:- =10x1 Change in National Income-MultiplierxAG Remainder of the recessionary gap=20 billion-10 billion = $10 billion Step 3 Tax Multiplier = MPC1 - MPC =0.9/0.1 = 9 Change in Income Tax Multiplier * Change in Taxes Change in Income required = 10 billion Putting in values: =$10 billion 10 billion = 9 * (- Change in Taxes) (Negative Sign is used to denote reduction in taxes) Changes in Taxes = -1.11 billion Therefore, tax needs to be reduced by $1.11 billion.
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