Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 27.A, Problem 2TY
To determine
The effect of an increase in both government spending and tax on equilibrium GDP on the
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Suppose the government increases expenditures by $100 billion and the marginal propensity to consume is 0.50. By
how will equilibrium GDP change?
The change in equilibrium GDP is: $ billion.
(Round your solution to one decimal place.)
You have the following information. Calculate
equilibrium GDP and enter your number in
the box below.
C = 200 + 0.75YD
| = 800
G = 600
The government has a balanced budget.
Suppose the government increases expenditures by $50 billion and the marginal propensity to consume is 0.90. By how much will equilibrium GDP change?
The change in equilibrium GDP is: $ billion.
(Round your solution to one decimal place.)
Chapter 27 Solutions
Economics: Principles & Policy
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- suppose the government wishes to illuminate recessionary of a gdp of 100 billion in the MPC is .075. How much must the government increase in spending? Instead of increasing government spending by the amount you calculated what would be the effect of the government decreasing taxes by this amount explain?arrow_forwardWhat is the difference between tax cuts imposed on higher-income households compared with lower- and middle-income households? Discuss the implications for the multiplier and the effectiveness of the tax cuts for boosting GDP.arrow_forwardThe country is experiencing a serious rise in inflation which the government wants to control through fiscal policy. The Government will decrease spending by $20 million and increase taxes by $15 million. The marginal propensity to consume (MPC) is 0.80. What will be the effect on GDP and by how much?arrow_forward
- Explain the basic idea of the expenditure multiplier and the role consumers' play.arrow_forwardConsumer saves 15% of additional income, spends 65% of income on goods and services and spends 20% on imports. What is the tax multiplier?arrow_forwardWhat is income-expenditure equilibrium? Derive aggregate demand curve from income expenditure equilibrium when the price level is not changed.arrow_forward
- Given the information below, answer the questions that follow. C = $40 + 0.8Y I = $30 G = $40 X – M = -$10 a) What is the equilibrium GDP? Explain why $550 is not the equilibrium. b) What is the marginal propensity to consume (MPC) in this question? (Explain) c) What is the multiplier in this question and explain the significance of the multiplier? (Show all work) d) Assuming that the full employment level of output is $600, what kind of gap exists and how large is it? Explain e) If transfer payments increased by $10 and the price level did not change, what would the new equilibrium be? (Show all work) f) How would your answer to part (e) change if the price level did change?arrow_forwardSuppose an economy is operating at point A on the graph showing aggregate demand. A decrease in the aggregate price level causes the economy to move to point B On the graph showing aggregate expenditures (AE), show the change caused by the movement from point A to point B on the aggregate demand curve. Aggregate price level Aggregate demand Aggregate output Aggregate expenditures Income (Y) Y-AE AEarrow_forwardSuppose the marginal propensity to consume (MPC) is either 0.75, 0.96, or 0.62. a. For each value of the MPC, calculate the impact of a one-dollar decrease in taxes on GDP. Instructions: Enter your responses rounded to one decimal place. MPC Impact of a one-dollar decrease in taxes 0.75 0.96 0.62 b. For each value of the MPC, calculate the impact on GDP of a $250 million decrease in taxes. Instructions: Enter your responses rounded to one decimal place. MPC Impact on GDP 0.75 $ 0.96 $ 0.62 $ Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- Given the following information, C=500 + 0.7Yd T 0.2Y I= 400 G= 100 a. Calculate the national income equilibrium. b. Based on your answer in (a), draw the aggregate expenditure graph. C. Suppose that investment changes by 300, what would happen to the national income equilibrium? d. Suppose that tax (T) changes, and the new T is T-0.2Y+50, calculate the new national income equilibrium. 2.arrow_forwardThe following graph shows the total expenditure line (TE) for an economy where current equilibrium output is $400 billion and potential output is $275 billion. The economy is experiencing _________ (a contractionary gap, an inflationary gap) equal to $______ billion. To close the output gap, government purchases could _______ (increase, decreease) by _____ ($50, 150, 75) billion. Thus, the value of the multiplier for this economy is ___________ (1.6667, 1.4545, 0.6, 0.3125, 0.4545). On the previous graph, shift the TE line to show the change in total expenditure necessary to close the output gap.arrow_forwardSuppose the president is successful in passing a $5 billion tax increase. Assume that taxes are fixed, the economy is closed, and the marginal propensity to consume is 0.75. What happens to equilibrium GDP? There is a $20 billion increase in equilibrium GDP. There is a $20 billion decrease in equilibrium GDP. There is a $15 billion increase in equilibrium GDP. There is a $15 billion decrease in equilibrium GDP.arrow_forward
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