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Suppose the consumption function is C = $500 billion + 0.9Y and the government wants to stimulate the economy.

2. Suppose the consumption function is C = $500 billion + 0.9Y
and the government wants to stimulate the economy. By how much will aggregate demand at
current prices shift initially (before multiplier effects) with
(a) A $50 billion increase in government purchases?
$550 billion
(b) A $50 billion tax cut?
$545 billion
(c) A $50 billion increase in income transfers?
$500 billion
What will the cumulative AD shift be for
(d) The increased G?
(e) The tax cut?
(f) The increased transfers?

3. Suppose the government decides to increase taxes by $30 billion in order to increase Social
Security benefits by the same amount. How will this combined tax-transfer policy affect aggregate
demand at current prices?

5. If the AD shortfall is $800 billion and the MPC is 0.8,
(a) How large is the desired fiscal stimulus?
(b) How large an income tax cut is needed?
(c) Alternatively, how much more government spending would achieve the target?
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Economics-8090137.doc

2. Suppose the consumption function is C = $500 billion + 0.9Y and the government wants
to stimulate the economy. By how much will aggregate demand at current prices shift initially
(before...

Sign up to view the full answer

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