Imagine the government wants to conduct an expansionary fiscal policy and needs an expert to answer the following questions before making a decision. a) Calculate the value of the multiplier effect if the marginal propensity to consume is 0.8. b) Calculate the increase in GDP which will occur, if the government increases its government spending by $600 million and the marginal propensity to consume is 0.8.
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- Consider an economy in which the marginal propensity to consume is 0.8 and GDP is currently at 12,000. a) The government wishes to increase GDP to 13,000, and it is considering changing only one of its fiscal tools: 1. government purchases 2. taxes 3. transfer payments How much would the government have to change each of these fiscal policy tools to achieve its goal? (Use the simple spending multiplier for this part and below.) b) Suppose instead that the government wishes to reduce GDP to 10,000, and again, it is considering using only one of its three available fiscal policy tools. How much would it change each of these fiscal tools to achieve its goal?Suppose the following list of events describes all of the economic activity resulting from an increase in government spending. Suppose that at each step after the initial one, the marginal propensity to consume is 0.67 and the tax rate is 16%. Step 0. The government spends $8500 on meat to host a very large dinner for foreign diplomats. Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his daughter. Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful candlesticks as gifts for all of her friends. Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to improve his house. Instructions: Modify the settings in the interactive tool to represent this event. Then click "Spending Rounds" and use the table to answer the following questions. Round answers to the nearest cent, if necessary. How much…Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for the economy is______, and the spending multiplier for the economy is______. suppose the government in this economy decides to decrease the government purchases by $300 billion. The decrease in government purchases will lead to a decrease in income generating an initial change in consumption equal to______. This decreases income yet again, causing a second change in consumption equal to_______. the total change in demand resulting from the initial change in government spending is_____________. The following graph shows that aggregate demand curve (AD1) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the spending multiplier effect takes place. Hint: be sure that the new aggregate demand curve (AD2) is parallel…
- Suppose the following list of events describes all of the economic activity resulting from an increase in government spending. Suppose that at each step after the initial one, the marginal propensity to consume is 0.62 and the tax rate is 8%. Step 0. The government spends $8500 on meat to host a very large dinner for foreign diplomats. Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his daughter. Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful candlesticks as gifts for all of her friends. Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to improve his house. Instructions: Modify the settings in the interactive tool to represent this event. Then click "Spending Rounds" and use the table to answer the following questions. Round answers to the nearest cent, if necessary. How much does…Suppose the following data for an economy; a consumption function of C = 800 + 0.8Yd, Investment spending is fixed at 300, Government purchases are 400, and net taxes are 100. A.) What is the MPC, MPS, and the value of the tax multiplier? B.) Suppose government increases taxes by 100, use the corresponding multiplier to calculate the new equilibrium level of income. C.) Check to ensure that the multiplier worked (confirm algebraically that your answer in B is correct, that is, solve for the new equilibrium level of income (Y)).Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The marginal propensity to consume (MPC) for this economy is _____ , and the spending multiplier for this economy is _____ Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to $______ billion. This decreases income yet again, leading to a second change in consumption equal to $________ billion . The total change in demand resulting from the initial change in government spending is $ ________ trillion. The following graph shows the aggregate demand curve (AD1AD1) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2AD2) after the multiplier effect takes place. For simplicity,…
- 3. a) Suppose economists observe that an increase in government spending of 300 crore taka raises the total demand for goods and services to 400 crore taka. If these economists ignore the possibility of crowding out effect, calculate the marginal propensity to consume (MPC)? b) Now suppose economists allow for crowding out. Would their new estimate of the MPC be smaller or larger than your answer to part a, explain.The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The marginal propensity to consume (MPC) for this economy is (0.25 or 0.75 or 1 or 1.33 or 4), and the spending multiplier for this economy is (0.25 or 0.75 or 1 or 1.33 or 4). Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to (-$1,000 billion or -$187.5 billion or -$93.8 billion or - $62.5 billion or -500 billion). This decreases income yet again, leading to a second change in consumption equal to (- $93.8 billion or - 1,000 billion or - $500 billion or - $140.6 billion or -62.5 billion). The total change in demand resulting from the initial change in government spending is (-$1 trillion or - $1.9…The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is (0.2 or 0.8 or 1 or 1.25 or 5), and the spending multiplier for this economy is (0.2 or 0.8 or 1 or 1.25 or 5). Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government spending will lead to an increase in income, creating an initial change in consumption equal to (320 billion or 2000 billion or 1000 billion or 80 billion or 160 billion). This increases income yet again, leading to a second change in consumption equal to (160 billion or 80 billion or 1000 billion or 2000 billion or 256 billion). The total change in demand resulting from the initial change in government spending is (2 trillion or 0.8 trillion or 1.6 trillion or 3.2 trillion).
- Suppose there is some hypothetical closed economy in which households spend $0.85 of each additional dollar they earn and save the remaining $0.15. The marginal propensity to consume (MPC) for this economy is____ , and the spending multiplier for this economy is ____. Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to _____ . This decreases income yet again, leading to a second change in consumption equal to ____ . The total change in demand resulting from the initial change in government spending is ____.Consider a hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The marginal propensity to consume (MPC) for this economy is and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to This decreases income yet again, causing a second change in consumption equal to . The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD₁) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD 2) is parallel to the initial aggregate demand curve…Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is , and the spending multiplier for this economy is . Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to . This increases income yet again, causing a second change in consumption equal to . The total change in demand resulting from the initial change in government spending is .