10. If MPC= 0.9 and the MPI = 0.1 a $5 billion decrease in government spending w
ID: 1092137 • Letter: 1
Question
10. If MPC= 0.9 and the MPI = 0.1 a $5 billion decrease in government spending will cause equillibrium output to: (Points : 7)
11. Deposits at the ABC bank are $600,000, and the reserve requirement is 20 percent. Cash reserves equal $160,000. Excess reserves equal _______________.
10. If MPC= 0.9 and the MPI = 0.1 a $5 billion decrease in government spending will cause equillibrium output to: (Points : 7)
11. Deposits at the ABC bank are $600,000, and the reserve requirement is 20 percent. Cash reserves equal $160,000. Excess reserves equal _______________.
Explanation / Answer
(10)
Output multiplier = 1/1-MPC+MPI = 1/(1-0.9+0.1) = 1/0.2= 5
Thus, a $5 billion decrease in government spending will cause equillibrium output to decrease by $25 billion
(11)
Required cash reserve = 600000 x 0.2 = $120,000
Excess reserve = 160000-120000 = $140,000
Hope this helps!
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