Question

Assume that a hypothetical economy with an MPC of 0.8 is experiencing severe recession. Instructions: In part a, round your answers to 2 decimal places. Enter your answers as positive numbers. In part b, enter your answers as whole numbers. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? b. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt.

Answer 1

Answer:

a)Tax cut = $6.25 billion.

The amount by which government spending would rise to shift the aggregate demand curve rightward by $25 billion? "" Is $5 BILLIONS"""

b)INCREASE GOVERNMENT SPENDING by $25 billion.

INCREASE TAXES by $25 billion.

Explanation:

a.)To calculate the value of spending value, the formula below is used.

multiplier spending=1/1-MPC

multiplier spending==1/1-0.8=5

Tax cut Multiplier = MPC/1-MPC

Tax cut Multiplier = 0.8/1 -0.8

Tax cut Multiplier = 4

The required government spending = 25/3 =5

Tax cut = $6.25

The answer is increase in spending=25 billion, increase in taxes= 25$billion.The spending will increase income=25x5=$125billion.The tax increase will reduce income=25x4=$100billion.In sum the income will increase=125-100=$25billion.

b) The one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt is to

INCREASE GOVERNMENT SPENDING by $25 billion.

INCREASE TAXES by $25 billion.