1) If the Federal Reserve wants to up GDP by $400 billion and the MPC=.95, by...

1) If the Federal Reserve wants to up GDP by $400 billion and the MPC=.95, by how much would they need to change government spending? Would G be increasing or would it be decreasing?

2) If instead of using government spending changes, they instead change taxes: by how much would they to change? WOuld they be increasing or would they be decreasing?

Expert Solution

1. Government spending multiplier, dY/dG = 1/1-MPC

dG = 400 x (1-0.95)

dG = $20 b

Increase g by 20 b

2. Tax multiplier, dY/dT = -MPC/1-MPC

dY/ dT = -0.95 / (1-0.95)

dT = 400 / -19 = -21.08b

decrease taxes by 21,08 b

dT = -21.05

Rahul Sunny answered 2 years ago

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