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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?

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?
I am having a hard time understanding MPC or multiplierin doing this problem. can you explain further?
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Economics-8099917.doc

If the AD shortfall is $800 billion and the MPC is 0.8,
(a) How large is the desired fiscal stimulus?
The multiplier = m = change in AD/ change in G
M = 1/ (1-MPC) = 1.2 = 5
We want change in AD to...

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