Question

In: Economics

government expenditure increased from 537,154,659,558 SAR on 2019 to 559,740,919,125 SAR on 2020, Assume Marginal Propensity to Consume is 0.80

government expenditure increased from 537,154,659,558 on 2019 to 559,740,919,125 on 2020, Assume Marginal Propensity to Consume is 0.80 (some studies show that MPC is between 0.7 to 0.95). Calculate:

a- Multiplier effect.

b- Increase in GDP due to increase on government expenditure from 2019 to 2020.

c- How does your answer on part b will be if there is crowding out effect? (you only need to say: increase, decrease, or it does not change)


Solutions

Expert Solution

1) Multiplier effect refers to the increase in income or real GDP by more than percentage rise in Government expenditure.

Multiplier = Change in income/ Change in goverment expenditure

= 1/(1-MPC)

= 1/(1-0.8)

= 1/0.2

=5


2) Increase in real GDP = Multiplier × Increase in government expenditure

= 5 × 22586259567

= 112931297835 SAR


3) If there is a crowding-out effect, the rise in income will be affected negatively due to the interest rate effect. In other words, the rise in government expenditure will cause a rise in market interest rate which will lead to a fall in private induced investment. So, a part of rising in aggregate demand (due to govt expenditure) will be compensated by a fall in investment expenditure. So, overall the real GDP or Income will decrease from the answer which has been arrived at in part b.



Related Solutions

Currently, a government's budget is balanced. The marginal propensity to consume is 0.80. The government has...
Currently, a government's budget is balanced. The marginal propensity to consume is 0.80. The government has determined that each additional $10 Billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.1 percentage point. It has also determined that every 0.1 percentage point change in the market interest rate generates a change in investment expenditures equal to $2 Billion. Finally, the government knows that to close a recessionary gap and take...
Currently, a government's budget is balanced. The marginal propensity to consume is 0.80. The government has...
Currently, a government's budget is balanced. The marginal propensity to consume is 0.80. The government has determined that each additional $10 Billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by 0.1 percentage point. It has also determined that every 0.1 percentage point change in the market interest rate generates a change in investment expenditures equal to $2 Billion. Finally, the government knows that to close a recessionary gap and take...
Suppose output and income is equal to 24200, the marginal propensity to consume is 0.80, and...
Suppose output and income is equal to 24200, the marginal propensity to consume is 0.80, and autonomous consumption is 200. Calculate total saving for this economy, assuming no public or foreign sector. (Round your answer to the nearest whole number.) Your Answer:
If the marginal propensity to consume is 0.81 and there is an initial increase in Government...
If the marginal propensity to consume is 0.81 and there is an initial increase in Government Spending of $83 Billion, how much will the recipients of that $83 Billion spend on Investment? a- 67.23 b-0.81 billion c- 81 billion d- 15.77 e- 436.84 f- none If the Keynesian Multiplier is 5.3 and there is an initial increase in Government Spending of $56 Billion, Real GDP in the economy will increase by _____. a- 45.43 billion b- 0 c- 5.3 billion...
1. If the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4,...
1. If the marginal propensity to consume is 0.6, the marginal propensity to save is 0.4, and government spending increases by $2 billion at the same time taxes rise by $2 billion, equilibrium income will: rise by $2 billion. is the answer, I just dont know what steps to undertake to get the answer nor know what equation to use. 2. In the nation of Economia, the economy is over heating and there is danger of inflation. The chief economist...
The nation of Maximus has a marginal propensity to consume of .90 and the government has...
The nation of Maximus has a marginal propensity to consume of .90 and the government has decreased taxes by a lump-sum amount of $1 billion. Assume there is no international trade or changes to the aggregate price level. a. What is the value of the tax multiplier in Maximus? b. By how much will real GDP change after the $1 billion decrease in taxes? c. If the government wanted to accomplish the same increase in real GDP you found in...
Consider two economies. In economy A:  autonomous consumption equals 700, the marginal propensity to consume equals 0.80,...
Consider two economies. In economy A:  autonomous consumption equals 700, the marginal propensity to consume equals 0.80, taxes are fixed at 50, investment is 100, government spending is 100, and net exports are 40. In economy B: autonomous consumption equals 1000, the marginal propensity to consume equals 0.8, taxes are proportional to income such that consumers pay 25% of their income as taxes, investment is 250, government purchases are 150, and net exports are 400. Question 1: What is the planned...
Assume that autonomous consumption = 100, and the marginal propensity to consume = 80%.         At what...
Assume that autonomous consumption = 100, and the marginal propensity to consume = 80%.         At what level of disposable income will savings = 0?                     6. If actual investment is higher than planned investment, what is happening to business inventories?                    Inventories are growing           Inventories are shrinking           Inventories are holding steady           It depends upon where we are in the busienss cycle
If the marginal propensity to consume is 0.9, the tax rate 0.35, and the propensity to...
If the marginal propensity to consume is 0.9, the tax rate 0.35, and the propensity to import 0.2, then the value of the multiplier is (to 3 decimal places):
If the Government  cut income taxes by 100 billion and the marginal propensity to consume (MPC) is...
If the Government  cut income taxes by 100 billion and the marginal propensity to consume (MPC) is equal to .75? How would this tax cut impact the National Budget and the National Debt? What are the pros and cons of running a deficit? Would you support such a tax cut and for whom should we impose the tax cut?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT