Question

In: Economics

Suppose economists observe that an increase in government spending of $10 billion raises the total demand...

Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion. 1. If these economists ignore the possibility of crowding out, what would they estimate the marginal propensity to consume (MPC) to be? Round your answer to the nearest one hundredth. 2. Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than their initial one?

Solutions

Expert Solution

Given that an increase in government spending is \(\$ 10\) billion and the total demand for goods and services is \(\$ 30\) billion.

Calculate Multiplier:

$$ \begin{aligned} \text { Multiplier } &=\frac{\text { Demand for gooods and services }}{\text { Government Spending }} \\ &=\frac{30}{10} \\ &=3 \end{aligned} $$

Calculate \(M P C:\)

$$ \begin{aligned} \text { Multiplier } &=\frac{1}{1-M P C} \\ 1-M P C(\text { Multiplier }) &=1 \\ (1-M P C) 3 &=1 \\ 3-3 M P C &=1 \\ 3 M P C &=2 \\ M P C &=\frac{2}{3} \end{aligned} $$

Therefore, the value of Marginal Propensity to Consume is \(\frac{2}{3}\)

If the economists allow for crowding out then the new estimate of \(M P C\) would be larger than the initial one.


Related Solutions

Suppose economists observe that an increase in government spending of 300 crore taka raises the total demand for goods and services to 400 crore taka.
a) Suppose economists observe that an increase in government spending of 300 crore taka raises the total demand for goods and services to 400 crore taka. If these economists ignore the possibility of crowding out effect, calculate the marginal propensity to consume (MPC)? b) Now suppose economists allow for crowding out. Would their new estimate of the MPC be smaller or larger than your answer to part a, explain.
if government spending decreases by $10 billion and taxation decreases by $10 billion, there will be...
if government spending decreases by $10 billion and taxation decreases by $10 billion, there will be no change in equilibrium output and employment.
An increase in government spending shifts aggregate demand
An increase in government spending shifts aggregate demand a. to the right. The larger the multiplier is, the less it shifts b. to the left. The larger the multiplier is, the farther it shifts. c. to the left. The larger the multiplier is, the less it shifts. d. to the right. The larger the multiplier is, the farther it shifts.
Congress just passed close to a $500 billion increase in government spending: A. How will this...
Congress just passed close to a $500 billion increase in government spending: A. How will this impact the Federal Deficit and the National Debt? What are the pros and cons of running such a large deficit and debt?   
Suppose the government enacts a stimulus program composed of $400 billion of new government spending and...
Suppose the government enacts a stimulus program composed of $400 billion of new government spending and $200 billion of tax cuts for an economy currently producing a GDP of ?$14,000 billion. If all of the new spending occurs in the current year and the government expenditure multiplier is 1.8?, the expenditure portion of the stimulus package will add _______ percentage points of extra growth to the economy. ?(Round your response to two decimal places?.) If the government taxation multiplier is...
Congress just passed close to a $500 billion increase in government spending:     B. How will...
Congress just passed close to a $500 billion increase in government spending:     B. How will this impact U.S. national savings, investment, capital per worker, output per worker and the steady state in Solow’s Growth Model. Make sure to include an intuitive and graphical analysis as well as the policy recommendations in Solow’s growth model.
Congress just passed close to a $500 billion increase in government spending:     C. How will...
Congress just passed close to a $500 billion increase in government spending:     C. How will this impact C, AD, Prices and inflation, output, and unemployment? Make sure to include an analysis using the intermediate run AD/AS model with both an intuitive and graphic analysis. (Assume that the AS supply curve is vertical like it is in the Classical Model).
Suppose output is $35 billion, government purchases are $10 billion, consumption is $15 billion, and net...
Suppose output is $35 billion, government purchases are $10 billion, consumption is $15 billion, and net exports are $8 billion. Assume net factor payments equal 0. (a) Calculate the equilibrium amount of investment for this economy. Show your work. (b) Calculate the equilibrium amount of absorption for this economy. Show your work. (c) Calculate the equilibrium amount of the financial account balance for this economy. Show your work. (d) Given the value you found for the financial account balance, do...
Suppose the government decided to increase government spending (Go) by 50 million dinars, and decided to...
Suppose the government decided to increase government spending (Go) by 50 million dinars, and decided to increase the fixed taxes (To) by the same amount, i.e. by 50 million dinars, and if you know that the marginal propensity to consume (mpc) is 0.75, calculate the following: 1. The effect of the increase in government spending on the level of balanced income. 2. The effect of the increase in the tax on balanced income. 3. The total effect of the effect...
If, according New Classical economists, fiscal policy is inadequate because any government spending increase causes: a....
If, according New Classical economists, fiscal policy is inadequate because any government spending increase causes: a. most households save rather than spend. b. business to decrease their investments. c. private individuals to spend more and save less.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT