TAYLOR of Macro. Fall 2017 Home Grades Personalized Reviews Discussion Course Ma

Question

TAYLOR of Macro. Fall 2017 Home Grades Personalized Reviews Discussion Course Materials The Influence of Monetary and Fiscal Policy on Aggregate Demand: Algorithmic End of Chapter Graded Assignment Read Chapter 341 Back to Assignment Due Sunday 12 10.17 at 1145 PM Mttempts: Keep the Highest: 0/2 7. Problems and Applications Q7 suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be Now suppose the economists allow for crowding out Ther new estimate of the MPC would be than their nital one. Grade It Now Continue wilthout saving Copyright Naticeserms of use Prvacy Notikce Secunity Notice Accessiblity DOLL F8 F9F10 F12 PrtScr Insert Delete F11 5 6 8 9 0

Explanation / Answer

now if a 10 billion increase in spendings increase the output by 30 billion thyen MPC ,

10(1/MPS) = 30

so MPS = 1/3, NOW MPC+MPS = 1 SO MPC = 2/3

2- now if we allow for crowding out means that the multiplier must be large so as to convert 10 bilion to 30 billion,

so for thus to happen mps must be small and thus mpc must rise.

so mpc will be higher than the initial one

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