Chapter 30 Questions - rapidly.not to reduce the price...

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Lisa Mauro Economics I Chapter 30 Homework 1. Printed out 2. MPC = 1/(1-0.8) = 5 and the Taxcut = 0.8/(1-0.8) = 4. To get increase in aggregate demand of $25 billion, increase in government spending required is $25/5 = $5Billion. If tax cut route is followed, to increase the aggregate demand by $25 billion, a tax cut of $25/4 = $6.25Billion required. Difference is due to the first round itself a govt increase of $5 billion leads to an increase in aggregate demand by the Govt by $5 billion, where when the tax cut of $5 given, taxpayers do not increase their aggregate demand by $6.25, buy only $5 billion as they save $1.25Billion ~ (1-0.8)*6.25 3. Options are to reduce government spending, increase taxes, or some combination of both. If the price level is flexible downward, it will fall. In the real world, the goal is to reduce inflation to keep prices from rising so
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Unformatted text preview: rapidly.not to reduce the price level. A person wanting to preserve the size of government might favor a tax hike and would want to preserve government spending programs. Someone who thinks that the public sector is too large might favor cuts in government spending since this would reduce the size of government. 7. When the economy enters a recession, net tax revenue falls. Specifically, revenues from income and excise taxes decline as unemployment rises and consumer spending falls. At the same time, transfer payments to help the poor and/or unemployed rise. If tax revenue falls and the government is required to balance the budget, it will be forced to either cut spending or increase taxes both of which are contractionary policies likely to worsen the recession....
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