10. The balanced budget multiplier Aa Aa Suppose the marginal propensity to cons

Question

10. The balanced budget multiplier Aa Aa Suppose the marginal propensity to consume (MPC) in a hypothetical economy is 0.70 while the marginal propensity to import (MPI) is 0.20. Since the spending multiplier in this economy is government spending by $40 billion, the equilibrium level of real GDP would increase by , if the government of this economy were to increase billion. Since the tax multiplier in this economy is $40 billion, the equililbrium level of real GDP would decrease by , if the government of this economy were to increase taxes by billion. Accordingly, if the government of this economy increased government spending by $40 billion and financed the increased spending completely through taxes, the equilibrium level of real GDP would billion. by

Explanation / Answer

a) spending multiplier = 3.3

real gdp increases by = 3.3 * 40 = $132 billio.

because, spending multiplier = 1/1-mpc = 1/ 1-0.70 = 3.3

b) tax multiplier = -mpc / 1-mpc = -0.70 / 0.30 = - 2.3

equilbruim level of income decreases by = 2.3 * 40 = $92 billion

c) equilbruim GDP would decreased by $17.3 billion

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