March 27, 2017

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Assume that the government purchases decrease by 10 billion, with other factors held constant including the price level. Calculate the change in the level of real GDP demanded for each of the following values of the MPC. Then calculate the change if the government, instead of reducinG its purchases, increased aitonomous net taxes by 10 billion. a.0.9 b. 0.8 c. 0.75 d. 0.6 I have been struggling with these questions for days and what I have come up with for the first part of the question is a. 0.1 b. 0.2 c. 0.25 d. 0.4 Have I done these correctly? And how do I figure out the second part to the question?

  • macroeconomics - ,

    The answer to your first question is no.

    Find in your text book some explanation of Multipliers. Without going into detail, the government spending multiplier is 1/mps, while the taxation multiplier is (1/mps - 1)

    Remember, MPC+MPS=1.

    So, with an MPC=.9, MPS=.1. So the multiplier is 1/.1 = 10. So, if government spending decreases by 10B, GDP will decline by 10B*10 = 100B.

    Repeat for the other MPC values.

    With a MPS of .1, the taxation multiplier is 1/.1 - 1 = 9. So, if taxes go up by 10B, GDP declines by 90B.

  • macroeconomics - ,

    0.8 same question diffrent numbers

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