Second Evaluation Summer 2018 I. According to the Venezuelan National Institute

Question

Second Evaluation Summer 2018 I. According to the Venezuelan National Institute of Statistics, the Basket of Goods & Services a nd Gross Domestic Product (GDP) for the period 2009-2016 are as shown on Table 1. Table 1 Basket of Year Goods &GDP; (Current $) 2009 2010 2011 2012 2013 2014 2015 2016 Services 13,500 17,650 22,125 28,125 35,840 43,120 67,250 113,260 494,591,535 677,593,637 707,262,549 1,016,834,748 1,357,487,061 1,635,451,060 2,245,843,966 3,031,242,431 Given that: (a) the Base Year is 2009; (b) The Marginal Propensity to Consume (MPC) is 80%; and (c) The Reserve Requirement is 25%. You are to implement a Fiscal or Monetary Policy (Your Choice) that allows to close 2017 exacty at the same level of 2015. What type of policy and magnitude should be implemented?

Explanation / Answer

It is given that GDP in 2016 is $ 3031,242,431

A policy allows 2017 GDP to close at the same level of 2015. That is 2017 GDP is $2245,843,966

A monetary policy can be applied but here money supply is not given, so, we can't determine the magnitude of monetary policy that will achieve 2017 GDP.

A fiscal policy can also be applied to get the same desired result. Here MPC = 80? = 0.8

Therefore, multiplier = 1/(1 - MPC) = 1/0.2 = 5

Change in GDP = multiplier * change in government spending

Or, (2,245,843,966 - 3031,242,431) = 5 * ?G

Or, ?G = - 785,398,465 / 5 = - 157,079,693

Therefore, a contractionary fiscal policy or, reduction in government spending by $ 157,079,693 will allow to close 2017 GDP exactly at the same level of 2015.

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