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Calculate the government-taxation multiplier for each marginal propensity to consume. Instructions: Round your answers to two decimal places.

a. The marginal propensity to consume (MPC) = 0.2, and the government spending multiplier is 1.25. The taxation multiplier is ?.

b. The marginal propensity to consume (MPC) = 0.5, and the government spending multiplier is 2.00. The taxation multiplier is ?.

c. The marginal propensity to consume (MPC) = 0.8, and the government spending multiplier is 5.00. The taxation multiplier is ?.

 

d. What do your results imply about the relative strength of changes in government spending versus changes in taxation for fiscal policy, all else equal?

i.   Changes in government spending will have an indeterminate effect on GDP and income compared to changes in taxes.

ii.  Changes in government spending will have a bigger effect on GDP and income than will changes in taxes.

iii. Changes in government spending will have an equal effect on GDP and income compared to changes in taxes.

iv. Changes in government spending will have a smaller effect on GDP and income than will changes in taxes.

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019
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Related questions

1. Suppose the multiplier in a given economy is 2.5. If government spending increases by 10, how much will GDP increase by?

10 * 2.5 = 25

2. Again, suppose the multiplier is 2.5. If investment spending falls by 4, what will be the change in GDP?

- Invetment spending falls by 4 --> - 4

2.5 * - 4 = - 10

3. Again, suppose that the multiplier for a given economy is 2.5. The authorities believe that GDP is currently below potential, and would like it to increase by 5. How much should they raise government spending to bring this about?

2. 5 * ___ = 5 ---> 5/2 = 2

Government spending should raise to 2

4. Suppose the marginal propensity to consume in an economy is equal to 0.75. What is the marginal propensity to save?

mpc = 0.75

marginal propensity to save = 1 - 0.75 = 0.25

5. Again, suppose the marginal propensity to consume is 0.75. If GDP increases by 20, what is the change in consumption?

mpc = 0.75

GDP (Y) = 20

C = 0 + 0.75 * 20 = 15

6. Suppose the marginal propensity to consume in an economy is equal to 0.75. If there were no taxes and no foreign trade, what would the multiplier be?

mpc = 0.75

1 - 0.75 = 0.25

0.25 —> 1/4

1 / 1/4 = 4/1 = 4

multiplier = 4

* I would like to know if my answers are correct and if I used the correct formulas to find the answers. Thank you.

Due to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assuming that the aggregate price level is constant, the interest rate is fixed in both countries, and there are no taxes and no foreign trade, complete the accompanying tables to show the various rounds of increased spending that will occur in both economies if the marginal propensity to consume is 0.5 in Westlandia and 0.75 in Eastland. What do your results indicate about the relationship between the size of the marginal propensity to consume and the multiplier?

Incremental Total change change Rounds in GDP in GDP 1 C = $40 billion ? 2 MPC — C = ? ? 3 MPC — MPC — C = ? ? 4 MPC — MPC — MPC — C = ? ? . . . . . . . . .

Total change in GDP (1/(1 MPC)) C ? Eastlandia Incremental Total change change Rounds in GDP in GDP 1 C = $40 billion ? 2 MPC — C = ? ? 3 MPC — MPC — C = ? ? 4 MPC — MPC — MPC — C = ? ? . . . . . . . . . Total change (1/(1 MPC)) C?

Fiscal Policy and the Multiplier: Consider an economy in which the marginal propensity to consume is 0.8 and GDP is currently at 12,000.

A) The government wishes to increase GDP to 13,000, and it is considering changing only one of its fiscal tools: 1) government purchases, 2) taxes, or 3) transfer payments. How much would the government have to change each of these fiscal policy tools to achieve its goal? (Use the simple spending multiplier for this part and below.)

B) Suppose instead that the government wishes to reduce GDP to 10,000 and again it is considering using only one of its three available fiscal policy tools. How much would it change each of these fiscal tools to achieve its goal?

C) Suppose instead that the government wished to raise GDP to 13,000, but the increase in government purchases would have to be matched by an equal increase in taxes. How much would they have to increase both to achieve this goal?

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