(b) Suppose the mpc is 0.75. Assume there is no crowding-out effect. If the government increases...

(b) Suppose the mpc is 0.75. Assume there is no crowding-out effect. If the government increases its expenditures by $300 billion, how much is the total increase in aggregate demand?

(c) If crowding out occurs, what happens to your answer in part (b)? Why does this happen?

(d) Using the same mpc of 0.75, if the government decreases taxes by $300 billion, instead of increasing government purchases by $300 billion, how much is the total increase in aggregate demand?

(e) Again, using the same mpc of 0.75, what would be the effect on aggregate demand if the government had increased its expenditures by $300 billion, and paid for the increase in expenditures by increasing taxes by $300 billion? Explain.

Expert Solution

Rahul Sunny answered 2 years ago

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(b) Suppose the mpc is 0.75. Assume there is no crowding-out effect. If the government increases...

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