HW3-Fmissed

# HW3-Fmissed - 1 Homework 3 Chapters 9-12 The most...

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1 Homework 3, Chapters 9-12 (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 1-4. In this problem the simple Keynesian multiplier is 1/(1-6/7)=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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HW3-Fmissed - 1 Homework 3 Chapters 9-12 The most...

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