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?
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?
