falcon company grants stock options to its upper and middle management employees. the options vest over a 4-year period, with 25
1 answer:
You might be interested in
Answer:
a. The government needs to increase spending by $0.45 billion and decrease taxes by $0.5 billion.
b. The real GDP will fall short of potential GDP by $3.6 billion.
c. The real GDP will fall short of potential GDP by $4 billion.
d. If government overestimates MPC change in spending or taxes will be too small.
Explanation:
The GDP gap is $4.5 billion.
a. The marginal propensity to consume is 0.90.
Government spending multiplier
=
=
= 10
The government needs to increase spending by
=
=
= $0.45 billion
Tax multiplier
=
=
= -9
The government needs to decrease taxes
=
=
= $0.5 billion
b. The marginal propensity to consume is 0.50.
Government spending multiplier
=
=
= 2
If the government increases spending by $0.45 billion,
The real GDP will increase by
=
=
= $0.9 billion
The real GDP will fall short of potential GDP by
= $4.5 billion - $0.9 billion
= $3.6 billion
c. Tax multiplier
=
=
= -1
If the government decreases taxes by $0.5 billion
The real GDP will increase by
=
= $0.5 billion
The real GDP will fall short of potential GDP by
= $4.5 billion - $0.5 billion
= $4 billion
d. If the government overestimates the value of the MPC, then its change in spending or taxes will be too small and real GDP will fall short of potential GDP.