Jeffery Walburgermod6

Jeffery Walburgermod6 - Jeffery Walburger Module 6 6-1...

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Jeffery Walburger Module 6 6-1 Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. a) By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? Ans: 5billion Show work: 1/1-.8=.2 then 1/.2= 5x5=25billion b) How large a tax cut would be needed to achieve this same increase in aggregate demand? Ans: 6.25 billion Show work:5/.8=6.25 billion c) Why the difference in a) and b) above? This is because part of a tax reduction increases saving, rather than consumption. To increase initial consumption be a specific amount, the government must reduce taxes by more than that amount. d) Determine one possible combination of government spending increases and tax decreases that would accomplish this same goal. 4 billion increase is government spending = 4 x the multiplier 5 =20 billion 4 billion / .8 = 5 billion ---------- 25 billion 6.2 Specifically, in one sentence each, state the main effect of built-in (or automatic)
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Jeffery Walburgermod6 - Jeffery Walburger Module 6 6-1...

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