Question

7. If the govt. wants to decrease RGDP by $40 billion and MPC equals 0.8, how much must the govt. increase taxes?_______8. If the MPC equals 0.9 and the Pres. and Congress increase fiscal spending by $60 billion, how much will RGDP increase? _______9. If the MPC equals 0.8 and the Pres. and Congress decrease income taxes by $60 billion, how much will RGDP increase? _______10. If the MPC equals 0.75 and Pres. & Congress increases taxes by $30 billion and decreases govt. spending by $30 billion, how will RGDP change?_______

Answer 1

7.

If MPC=0.8

MPS=1-MPC

=1-0.8

=0.2

Multiplier= 1/0.2

=5

Tax multiplier=-MPC/MPS

=-0.8/0.2

=-4

The Government wants to decrease RGDP by $40 billion

The required increase in the Tax is= gap / tax multiplier

=-$40/-4

=$10 billion

8.

If MPC=0.9

MPS=1-MPC

=1-0.9

=0.1

Multiplier= 1/0.1

=10

The Government want to increase the fiscal spending by $60 billion

The RGDP will increase by= Change in the Spending* spending multiplier

=$60*10

=$600 billions

9.

If MPC=0.8

MPS=1-MPC

=1-0.8

=0.2

Multiplier= 1/0.2

=5

Tax multiplier=-MPC/MPS

=-0.8/0.2

=-4

If the Pres. and Congress decrease income taxes by $60 billion, The RGDP will increase by= change in the tax* tax multiplier

=-$60 billion*(-4)

=$340 billion

10.

If MPC=0.75

MPS=1-MPC

=1-0.75

=0.25

Multiplier= 1/0.25

=4

Tax multiplier= -MPC/MPS

=-0.75/0.25

=-3

Change in the RGDP= increase in the tax * tax multiplier + decrease in the government spending* spending multiplier

=$30*(-3)+(-$30)*4

=-90-120

= -$210

Hence RGDP will decrease by $21 billion.