According to the information provided, the Marginal Propensity to Save (MPS) of the American is given as 0.1. See explanation below.
<h3>What is Marginal propensity to save?</h3>
The marginal propensity to save is the percentage of an increase in income that is not spent but is instead saved. It is the slope of the line drawn between saving and income.
<h3>What is the calculation justifying the above result?</h3>
Marginal propensity to save=change in savings/change in income
Here, change in savings=$500
Change in income=$5000
So, Marginal propensity to save (MPS)=500/5000
MPS =0.1
<h3>What is the tax multiplier in this economy?</h3>
Tax Multiplier=MPC/(1-MPC)
MPC=1-MPS
=1-0.1
=0.9
Tax multiplier=0.9/0.1
=9
So,
Tax Multiplier = 9
<h3>
Which component of aggregate demand will be most directly impacted by a change in the income tax rates? </h3>
Assume the government raises income tax receipts by $100 billion. As we all know, when the government raises income tax receipts, it impacts household disposable income.
Tax increases reduce disposable income, causing consumers to spend less and aggregate demand to fall. The overall change in aggregate demand that might occur is:
Change in aggregate demand(y)/change in tax(t)=MPC/MPS
=> y/100=0.9/0.1
=>y/100=9
y=$900
Hence,
Change in aggregate demand = $900
<h3>
Assume the government increases government spending by $200 billion. based on the information in part (a) What will be the total possible change in aggregate demand, ceteris paribus?</h3>
The government boosts its spending by $200. The following actions boost aggregate demand by $200 billion multiplied by the public spending multiplier.
Total potential change in aggregate demand:
=>change in aggregate demand (y)/change in government spending (g)=1/MPS
=>y/200=1/0.1
y=(1/0.1)×200
y=10 ×200
y=$2000
Hence,
Change in aggregate demand = $2,000.
<h3>What is the autonomous spending in the scenario from part (e)?</h3>
In the scenario from component (e), autonomous expenditure is $200 billion since this rise in government spending is not occurring in response to an increase in revenue.
<h3>Assuming all impacts were explained directly through the multipliers, and based on the information from part (b), what would be the change in gdp that would result from the government decreasing spending by $18 billion at the same time that it decreases corporate taxes by $20 billion?</h3>
The government cuts expenditure by $18 billion, with a spending multiplier of 10. (See previous computations).
Change in real GDP = -
$18 billion x 10 =
- $180 billion.
This results in a $180 billion fall in RGDP.
- MPC / (1 - MPC) = -0.9/0.1 = -9
Taxes are reduced by $20 billion.
RGDP change = tax multiplier * tax change
= -9* -$20 billion = $180 billion.
This equates to a $180 billion rise in real GDP.
As a result, the total change in real GDP = -$180 billion + $180 billion = 0.
Hence, GDP remains constant when the government cuts expenditure by $18 billion while cutting business taxes by $20 billion.
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