Question

Assume an open, mixed economy. That is, foreign trade is part of the economy, and the economy includes both a public (government) and a private (consumers and businesses) sector. Given this, aggregate demand is expressed as (C I G X). Assume the MPC is .7. Assume a stimulus package of $100 billion has been approved by Congress and the money has been spent. In order to pay for those expenditures, Congress also approved a $100 billion increase in individual income taxes. (This means Congress would not allow deficit spending in order to stimulate the economy.) Will these actions by Congress expand or contract the economy or are they just useless actions

Answer 1

Answer:

considering the economy is stable it will expand the economy

Explanation:

The multiplier effect of the 100 public spending will be partially negate by the negative multiplier of the taxes.

100 x 1 /(1-0.7)

-100 x 0.7/(1-0.7)

100/0.3 - 70/0.3 = 30/0.3

The income will increase for 100

a portion of this increase will go abroad because is an open economy and the effect will be lower than 100 but the economy will expand.