1. Suppose that investment spending decreases by 228 billion. If the marginal pr

Question

1. Suppose that investment spending decreases by 228 billion. If the marginal propensity to consume is 0.4, then what is the change in GDP?

2. If the tax multiplier is -0.6 and a $-62 billion tax decrease is implemented, what is the change in GDP holding everything else constant?

3.

Suppose the equilibrium real federal funds rate is 1 percent, the target inflation rate is 3 percent, the current inflation rate is 0.6 percent, and real GDP is 1.9 percent above the potential real GDP level. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor Rule the federal funds target rate is

Explanation / Answer

1)Govt. Expenditure multiplier=1/1-mpc=1/1-0.4=1/0.6=1.667

Govt. Expenditure multiplier is the change in income due to change in Government expenditure

Thus change in Y/Change in G=1.667

Change in Y=1.667*228=$380

2)tax multiplier=change in income/ change in tax

-0.6=change in income/-62billion

Thus change in income=62*0.6=$37.2 billion will be the increase in income

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