15. If the MPC is 0.6, and the government spends an additional S50b, the overall

Question

15. If the MPC is 0.6, and the government spends an additional S50b, the overall effect on GDP will be: a. an increase of $250b b. an decrease of $25h c. a decrease of $75b d. an increase of $125b. 16. If the MPC were to increase from 0.75 to 0.8, then the taxation multiplier would a. increase from 3 to 4 b. decrease from -3 to-4 c. increase from 4 to 5 d. decrease from -4 to -5 17. If the government wishes to increase GDP by $1,200b, and the MPC is 0.8, it should: a. increase taxes by $240b b. decrease taxes by $240b c. increase taxes by $300b d. decrease taxes by $300b 18. If interest rates increase, the government debt becomes a. more expensive to pay b. less expensive to pay c. more volatile d. less of a burden.

Explanation / Answer

15. Change in GDP = Change in Government spending / (1 - MPC)

Change in GDP = 50 billion / (1 - 0.6) = 50 billion / 0.4 = 125 billion

d) GDP increases by $ 125 billion.

16. Tax multiplier = - MPC/(1 - MPC)

Tax multiplier = - 0.75/(1 - 0.75) = - 0.75/0.25 = - 3

Tax multiplier = - 0.8/(1 - 0.8) = - 0.8/0.2 = - 4

b) decrease from - 3 to - 4.

17. Change in GDP = - MPC x Change in taxes / (1 - MPC)

1200 b = - 0.8 x Change in taxes / (1 - 0.8)

Change in taxes = - 300 b

d) Decrease taxes by 300 b.

18. a) more expensive to pay

More interest rate means government have to pay more amount to repay its loan.

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