Suppose that the national economy is experiencing a recession with an estimated

Question

Suppose that the national economy is experiencing a recession with an estimated recessionary gap of $20 billion. Congress is considering the use of fiscal policy to ease the recession, and due to current political sentiments, it has determined that the maximum spending increase the government is willing to support is $2 billion. The government wants to make up the remainder of the recessionary gap using tax cuts. If a spending increase of $2 billion is approved and the MPC is 0.75, by how much will taxes need to be reduced to close the remainder of the recessionary gap? Instructions: Round your answer to 2 decimal places. billion

Explanation / Answer

Change in Income = [Change in government spending / (1 - MPC)] + [ - MPC x Change in taxation / (1 - MPC)]

$ 20 billion =[ $ 2 billion / (1 - 0.75)] + [ - 0.75 x change in taxation / (1 - 0.75)]

$ 20 billion = $ 8 billion - 3 x Change in taxation

$ 12 billion = - 3 x Change in taxation

Change in taxation = - 4 billion

So, taxes need to be reduced by $ 4 billion

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.