1. Let’s look at Canada. Assume an equilibrium where Aggregate Expenditure is $1,350 billion and Real GDP in...

1. Let’s look at Canada. Assume an equilibrium where Aggregate Expenditure is $1,350 billion and Real GDP in $1,350 billion. (a) If Real GDP grew to 1,600, but AE only grew to 1,550 what is the marginal propensity to consume? 0.8

(b) From the initial state of $1,350, what change in taxes (positive or negative and actual numeric value) would bring GDP to $1,200 billion?

Solutions

Expert Solution

MPC is the change in AE by a division of change in real GDP.

MPC = Change in AE / Change in real GDP

= (1,550 – 1,350) / (1,600 – 1,350)

= 200 / 250

= 0.8 (Answer)

GDP reduces from $1,350 to $1,200. Therefore, the tax effect is negative here.

GDP is the aggregate of consumption (C), private investment (I), and government spending (G).

GDP = C + I + G

If there is no change in I and G, the imposition of tax reduces consumption and this is the reason why GDP is gone down.

Amount of tax = GDP before tax – GDP after tax

= 1,350 – 1,200

= $150 (Answer)

Rahul Sunny answered 1 year ago

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