My prof says only a was right at 100 billion, but b, c, and d were wrong??
I appreciate the help anyway cause she was on vacation. I have posted the answers she got....
2. The goverment raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts?
a. Public saving
b. Private saving
c. National saving
d. Investment
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b. she says it falls by 40 billion.
AND that c and d both are +60billion...
Your prof's answers are initial responses to the change from taxes. With a $100B increase in taxes, INITIALLY, 60B would come out of consumption and 40B out of savings-- b) private savings falls by $40B.
c) National savings is sum of public+private savings = +100B-40B = 60B.
I do have a problem with the prof's answer to d)=+60 The macro-economic literature generally treats Investment (i) as private investment. Government spending is a different animal altogether. For investment to go up by $60, investment must include government spending. Only then would investment = public+private savings.
That said, I have no apologies. I stand by my original answer. A change in taxes will have ripple effects throughout the national economy. -- Which is not being accounted for by your prof. Since there was no mention of what happens to government spending as a result of the tax increase, I assumed that it would be zero. (Which is typical in these initial first-semester macro-economic problems).
Note that even if I assumed the government spent all of the increased tax revenue, I still would not get your prof's answers. Your prof's answers only are initial changes, not final changes.
To determine the correct answers for each option, let's go through the scenario step by step. We are given that the government raises taxes by $100 billion and the marginal propensity to consume (MPC) is 0.6.
a. Public saving: Public saving is the difference between government revenue and government expenditure. Since taxes are increasing, government revenue will rise. However, without information on government expenditure, we cannot determine the direction or amount of change in public saving.
b. Private saving: Private saving refers to the portion of income that households save. If taxes increase, households have less disposable income, which generally leads to a decrease in private saving. To calculate the change in private saving, we need to multiply the change in taxes by the marginal propensity to consume (MPC). In this case, the change in taxes is $100 billion, and the MPC is 0.6. Thus, the change in private saving is 0.6 * $100 billion = $60 billion. Therefore, her statement that private saving falls by $40 billion is incorrect.
c. National saving: National saving is the sum of public saving and private saving. Since we do not have the information to determine the changes in public saving or private saving, we cannot determine the change in national saving.
d. Investment: Investment is typically funded by national saving. If there is an increase in national saving, it generally leads to an increase in investment. However, without information on the change in national saving, we cannot determine the direction or amount of change in investment.
To summarize, based on the information provided, we can only determine that private saving falls by $60 billion (not $40 billion). The changes in public saving, national saving, and investment cannot be determined without more information. It's essential to consider all relevant factors and make calculations based on the provided data to arrive at accurate answers.