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Homework 3, Chapters 912
(3/20/09)
The most frequently missed questions.
Chapter 9
Recall that
bT
NX
G
I
C
A
−
+
+
+
≡
, where
b
is the MPC.
[5]If (net) taxes
decrease
by $10 billion and the MPC is 6/7, what is the ultimate change
in GDP?
1.
A $70 billion increase.
2.
A $70 billion decrease.
3.
A $60 billion increase.
4.
A $60 billion decease.
5.
Neither of 14.
In this problem the simple Keynesian multiplier is 1/(16/7)=7.
As follows from the
definition of
A
, as posted above, the change in
A
is
Δ
A
= 
b
Δ
T.
The MPC is 6/7.
Since this is a tax decrease,
Δ
T
is $10 billion.
Therefore the change in
A
is
(6/7)($10 billion).
The change in equilibrium output is
b
A
Y
−
Δ
=
Δ
1
1
=
7
/
6
1
1
)
10
)(
7
/
6
(
−
= $60 billion.
WARNING:
TO FIND THE CHANGE IN
A
DO NOT FORGET TO WEIGHT
THE TAX CHANGE BY (MPC)= (b).
As I noted in class on several occasions, failing to weight the tax change in this way
is the most common mistake students make when asked to find the effects of a tax
change.
[7]In Freedonia if output is $600, inventories will ______.
(1)increase by $100.
(2)decrease by $100.
(3)increase by $200.
(4)decrease by $200.
(5)None of the above.
In problem 7 the MPC is 2/3.
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 Spring '08
 RDCothren
 Macroeconomics

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