Suppose that the MPC is 0.75 and that this economy has lump sum taxes. 1. What...

Suppose that the MPC is 0.75 and that this economy has lump sum taxes.

1. What is the spending multiplier?

2. What is the tax multiplier?

3. What will happen to GDP if taxes increase by 1,200?

4. What would to GDP if spending decreases by 1,200?

5. What decreases in taxes would have the same effect on the economy as the increase in G in (d)?

6. Suppose that both income and taxes increase by 2,000. What is the balanced budget multiplier? Prove that your answer is correct.

7. Briefly explain why, in the real world, spending and tax multipliers are likely to be smaller than what you calculated in the previous question ( even if the MPC is the same). Assume for simplicity that the economy is Not in deep recession.

Identify Answers and Show all work when appropriate.

Expert Solution

Rahul Sunny answered 2 years ago

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