it is felt gdp needs to increase by 700 in order to reach a full employment level by how much must government change taxes if they intend to increase spending on national defence by 120? they feel that the MPC in the country is .9 and they want to close the recessionary gap.
I presume you are in a basic economics course, where basic and simple multiplier concepts are presented. (As you advance in econ, the analysis and answered become much more complicated.
The government spending multiplier is 1/MPS = 1/(1-MPC) = 1/.1 = 10
So, increases in national defense by 120 will raise gnp by 1200.
Now then, the tax multiplier is the government multiplier less 1. In this example tax multiplier is 9. So, raising taxes by 55.55 leads to a drop in gnp by 500.
To calculate how much the government must change taxes to increase spending on national defense by 120, we need to use the spending multiplier and the tax multiplier.
The spending multiplier is calculated as 1 divided by the marginal propensity to save (MPS). In this case, the marginal propensity to consume (MPC) is given as 0.9, so the MPS is 1 - MPC = 0.1. Thus, the spending multiplier is 1 / 0.1 = 10.
Since the objective is to increase GDP by 700, we can use the spending multiplier to determine the required increase in government spending.
Change in government spending = Change in GDP / Spending multiplier
Change in government spending = 700 / 10 = 70
Therefore, the government needs to increase spending by 70 to achieve the 700 increase in GDP.
Now, let's calculate the tax multiplier. The tax multiplier is equal to the spending multiplier minus 1. Therefore, the tax multiplier is 10 - 1 = 9.
To find out how much the government needs to change taxes to close the recessionary gap, we will use the tax multiplier.
Change in taxes = Change in GDP / Tax multiplier
Change in taxes = 700 / 9 ≈ 77.78
Hence, the government must change taxes by approximately 77.78 to close the recessionary gap and increase spending on national defense by 120.