Question

1)

A. Determine the impact of an increase in government spending of $9000 when the MPC is .75

( show your work )

B. Determine the impact of an increase in taxes of $2400 when the MPC is .8

( show your work )

C. Determine the net impact upon the nation's economy that results from a decrease in spending of $1600 and an increase in taxes os $3000 when the MPC is .9

( show your work )

Answer 1

1)
A. According to the government spending multiplier formula,
Change in output/Change in spending = 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4
So, Change in output = Change in spending*4 = (9000)*4 = $36,000
Thus, real GDP or output increases by $36,000

B. According to the tax multiplier formula,
Change in output/Change in tax = -MPC/(1-MPC) = (-0.8)/(1-0.8) = (-0.8)/0.2 = -4
So, Change in output = Change in tax*(-4) = (2400)*(-4) = -$9,600
Thus, real GDP or output decreases by $9,600

C. According to the government spending multiplier formula,
Change in output/Change in spending = 1/(1-MPC) = 1/(1-0.9) = 1/0.1 = 10
So, Change in output = Change in spending*4 = (-1600)*10 = -$16,000
Thus, real GDP or output decreases by $16,000

B. According to the tax multiplier formula,
Change in output/Change in tax = -MPC/(1-MPC) = (-0.9)/(1-0.9) = (-0.9)/0.1 = -9
So, Change in output = Change in tax*(-4) = (3000)*(-9) = -$27,000
Thus, real GDP or output decreases by $27,000

Net effect on output = -16,000 - 27,000 = -$43,000

Thus, real GDP or output decreases by $43,000