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?
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.
0.8 same question diffrent numbers
To calculate the change in the level of real GDP demanded, you can use the formula for the multiplier effect:
Multiplier = 1 / (1 - MPC)
Where MPC represents the marginal propensity to consume.
a. For MPC = 0.9:
Multiplier = 1 / (1 - 0.9) = 1 / 0.1 = 10
Change in GDP = -10 billion * Multiplier = -10 billion * 10 = -100 billion
Therefore, the change in the level of real GDP demanded is a decrease of 100 billion.
b. For MPC = 0.8:
Multiplier = 1 / (1 - 0.8) = 1 / 0.2 = 5
Change in GDP = -10 billion * Multiplier = -10 billion * 5 = -50 billion
Therefore, the change in the level of real GDP demanded is a decrease of 50 billion.
c. For MPC = 0.75:
Multiplier = 1 / (1 - 0.75) = 1 / 0.25 = 4
Change in GDP = -10 billion * Multiplier = -10 billion * 4 = -40 billion
Therefore, the change in the level of real GDP demanded is a decrease of 40 billion.
d. For MPC = 0.6:
Multiplier = 1 / (1 - 0.6) = 1 / 0.4 = 2.5
Change in GDP = -10 billion * Multiplier = -10 billion * 2.5 = -25 billion
Therefore, the change in the level of real GDP demanded is a decrease of 25 billion.
For the second part of the question, if the government instead increases autonomous net taxes by 10 billion, the effect on the change in the level of real GDP demanded can be calculated using the same multiplier:
Change in GDP = -10 billion * Multiplier
You can substitute the respective MPC values into the formula to find the changes in GDP under each scenario.
To calculate the change in the level of real GDP demanded, you need to use the multiplier formula:
Multiplier = 1 / (1 - MPC)
Where MPC stands for the marginal propensity to consume, which is the proportion of additional income that households use for consumption.
For the first part of the question, you want to calculate the change in real GDP demanded when government purchases decrease by $10 billion. You need to multiply the initial change in government purchases (-$10 billion) by the multiplier.
Here are the calculations for each value of MPC:
a. MPC = 0.9
Multiplier = 1 / (1 - 0.9) = 10
Change in real GDP demanded = Multiplier * Change in government purchases
Change in real GDP demanded = 10 * (-$10 billion) = -$100 billion
b. MPC = 0.8
Multiplier = 1 / (1 - 0.8) = 5
Change in real GDP demanded = Multiplier * Change in government purchases
Change in real GDP demanded = 5 * (-$10 billion) = -$50 billion
c. MPC = 0.75
Multiplier = 1 / (1 - 0.75) = 4
Change in real GDP demanded = Multiplier * Change in government purchases
Change in real GDP demanded = 4 * (-$10 billion) = -$40 billion
d. MPC = 0.6
Multiplier = 1 / (1 - 0.6) = 2.5
Change in real GDP demanded = Multiplier * Change in government purchases
Change in real GDP demanded = 2.5 * (-$10 billion) = -$25 billion
For the second part of the question, when the government increases autonomous net taxes by $10 billion, you need to understand that autonomous net taxes are taxes that are not dependent on household income. Therefore, it's a lump sum tax change.
To calculate the change in real GDP demanded in this case, you need to multiply the change in taxes by the multiplier. Since the change in taxes is -$10 billion, you'll multiply it by the same multiplier values for each MPC.
So, the change in real GDP demanded would be:
a. -$10 billion * 10 = -$100 billion
b. -$10 billion * 5 = -$50 billion
c. -$10 billion * 4 = -$40 billion
d. -$10 billion * 2.5 = -$25 billion
The calculations you have provided for the first part of the question are incorrect. Please use the multiplier formula to recalculate them. I have provided the correct calculations for you to compare.