Economics (7th Edition) (What's New in Economics)
7th Edition
ISBN: 9780134738321
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 27.A, Problem 4PA
To determine
Government purchases multiplier.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier?
How does an increase in tax influence the size of the multiplier
In Utopia (a country with substantial excess resources), consumers spend 70% of their incomes and save 30%; the country spends 30% of GDP on imports and the government typically takes 10% of household incomes in taxation.a) What is the value of the multiplier?Last year, the Utopian Government spent 5Bn Utopian Dollars on current expenditure; Utopian households spent 0.5Bn Utopian Dollars in “autonomous consumption” and Utopian enterprises sold goods and services worth 10 Bn Utopian dollars to other countries. Utopian investors spent 15Bn Utopian dollars in maintaining and enhancing the country’s capital equipment.b) What was the value of GDP last year?c) What was the value of the Utopian Government’s budget surplus or deficit last year?d) How would the value of the multiplier (in 2(a) change if Utopia was a closed economy (so zero imports)?e) If the Utopian economy were already at its potential GDP (ie its full -employment GDP), what would happen to the value of the multiplier?
Chapter 27 Solutions
Economics (7th Edition) (What's New in Economics)
Ch. 27.A - Prob. 1PACh. 27.A - Prob. 3PACh. 27.A - Prob. 4PACh. 27.A - Prob. 5PACh. 27 - Prob. 27.1.1RQCh. 27 - Prob. 27.1.2RQCh. 27 - Prob. 27.1.3RQCh. 27 - Prob. 27.1.4PACh. 27 - Prob. 27.1.5PACh. 27 - Prob. 27.1.6PA
Ch. 27 - Prob. 27.1.7PACh. 27 - Prob. 27.2.1RQCh. 27 - Prob. 27.2.2RQCh. 27 - Prob. 27.2.3PACh. 27 - Prob. 27.2.4PACh. 27 - Prob. 27.2.5PACh. 27 - Prob. 27.2.6PACh. 27 - Prob. 27.2.7PACh. 27 - Prob. 27.2.8PACh. 27 - Prob. 27.3.1RQCh. 27 - Prob. 27.3.2RQCh. 27 - Prob. 27.3.3PACh. 27 - Prob. 27.3.4PACh. 27 - Prob. 27.3.5PACh. 27 - Prob. 27.3.6PACh. 27 - Prob. 27.4.1RQCh. 27 - Prob. 27.4.3RQCh. 27 - Prob. 27.4.4PACh. 27 - Prob. 27.4.5PACh. 27 - Prob. 27.4.6PACh. 27 - Prob. 27.4.7PACh. 27 - Prob. 27.4.8PACh. 27 - Prob. 27.4.9PACh. 27 - Prob. 27.5.1RQCh. 27 - Prob. 27.5.2RQCh. 27 - Prob. 27.5.3PACh. 27 - Prob. 27.5.4PACh. 27 - Prob. 27.5.5PACh. 27 - Prob. 27.5.6PACh. 27 - Prob. 27.5.7PACh. 27 - Prob. 27.6.1RQCh. 27 - Prob. 27.6.2RQCh. 27 - Prob. 27.6.3RQCh. 27 - Prob. 27.6.4RQCh. 27 - Prob. 27.6.5PACh. 27 - Prob. 27.6.6PACh. 27 - Prob. 27.6.7PACh. 27 - Prob. 27.6.9PACh. 27 - Prob. 27.6.10PACh. 27 - Prob. 27.6.11PACh. 27 - Prob. 27.7.1RQCh. 27 - Prob. 27.7.2RQCh. 27 - Prob. 27.7.3RQCh. 27 - Prob. 27.7.4PACh. 27 - Prob. 27.7.5PACh. 27 - Prob. 27.7.7PACh. 27 - Prob. 27.7.8PACh. 27 - Prob. 27.1CTE
Knowledge Booster
Similar questions
- Suppose the following list of events describes all of the economic activity resulting from an increase in government spending. Suppose that at each step after the initial one, the marginal propensity to consume is 0.62 and the tax rate is 8%. Step 0. The government spends $8500 on meat to host a very large dinner for foreign diplomats. Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his daughter. Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful candlesticks as gifts for all of her friends. Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to improve his house. Instructions: Modify the settings in the interactive tool to represent this event. Then click "Spending Rounds" and use the table to answer the following questions. Round answers to the nearest cent, if necessary. How much does…arrow_forwardSuppose government purchases increase by 10 billion dollars, and as a result, real GDP increases by 15 billion dollars. Calculate the multiplier. Explain why the multiplier is generally greater than 1.arrow_forwardTrue or False? Explain: The multiplier effect is likely to be greatest when the government spending is targeted at the poorest The poor will always spend most of the money they get as benefits as soon as possible Multiplier effect does not depend on who receives the money The richest people will spend a larger proportion of their money than the poorestarrow_forward
- Suppose the following list of events describes all of the economic activity resulting from an increase in government spending. Suppose that at each step after the initial one, the marginal propensity to consume is 0.67 and the tax rate is 16%. Step 0. The government spends $8500 on meat to host a very large dinner for foreign diplomats. Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his daughter. Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful candlesticks as gifts for all of her friends. Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to improve his house. Instructions: Modify the settings in the interactive tool to represent this event. Then click "Spending Rounds" and use the table to answer the following questions. Round answers to the nearest cent, if necessary. How much…arrow_forwardGraphically illustrate the effect of an increase in government purchases. Explain the government spending multiplier effect by using at least 200 words.arrow_forwardConsider a hypothetical economy. Households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The multiplier for this economy is . Suppose government purchases, G, in this economy increase by $300 billion. The increase in G will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income. Note: Use negative signs if numbers are negative. Change in G = $300 billion First Change in Consumption = billion Second Change in Consumption = billion • • • • • • Total Change in Income = billion Now consider the impact of a similar change in taxes. The (absolute value) of the tax multiplier in this question will be ; thus, if taxes change by $300 billion, spending will change by billion. Based on…arrow_forward
- Government expenditures represents one of the injections of expenditure. Explain how an increase in government spending may have a multiplier effect in the economy.arrow_forwardSuppose the MPC is 0.8. What is the tax multiplier in this economy? If the government were to lower taxes by $250 in this economy how much would Total Spending change as a result? Show your work.arrow_forwardPlease refer to this question as you answer the one attached. a) If government spending is increased to G=80,What happens to equilibrium income?explain using government spending multiplier what happens to imports?arrow_forward
- TRUE - OR - FALSE Government purchases and income taxes will have the same effect on the multiplier. O True O Falsearrow_forwardConsider a hypothetical economy. Households spend $0.90 of each additional dollar they earn and save the remaining $0.10. The multiplier for this economy is . Suppose government purchases, G, in this economy decrease by $150 billion. The decrease in G will lead to a decrease in income, generating a decrease in consumption that decreases income yet again, and so on. Fill in the following table to show the impact of the change in G on the first two rounds of consumption spending and, eventually, on national income. Note: Use negative signs if numbers are negative. Change in G = −$150 billion First Change in Consumption = billion Second Change in Consumption = billion • • • • • • Total Change in Income = billion Now consider the impact of a similar change in taxes. The (absolute value) of the tax multiplier in this question will be ; thus, if taxes change by -$150 billion, spending will change by billion. Based on…arrow_forwardIf consumption is C=100+0.75Yd Taxes is T=50+0.5Y Export is X=200 Import is M=50+0.25Y Government spending is G=150 Investment is I=200 .Use the multiplier applicable to export,to explain how a100–billion decline in demand for export could affect the economy’s: (i) GDP/income Answer An export multiplier is a multiplier that is applicable to export. The effect of a decline in demand by 100 billion on GDP/income will be computed by the export multiplier. Thus, Export Multiplier=1/(1−MPC+M) =1/(1-0.75+0.5)=1.33 The export multiplier shows that the GDP/income will be decreased by 1.33 billion with the decline in the 100-billion decline in the demand. please show how you get M=0.5arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Macroeconomics: Principles and Policy (MindTap Co...EconomicsISBN:9781305280601Author:William J. Baumol, Alan S. BlinderPublisher:Cengage Learning
Macroeconomics: Principles and Policy (MindTap Co...
Economics
ISBN:9781305280601
Author:William J. Baumol, Alan S. Blinder
Publisher:Cengage Learning