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Expenditure and Tax Multipliers

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Assume that government purchases decrease by $10 billion, with other factors held constant, including the price level. Calculate the change in the level of real GDP demanded for each of the following values of the MPC. Then calculate the change if the government, instead of reducing its purchases, increased autonomous net taxes by $10 billion.
a. 0.9
b. 0.8
c. 0.75
d. 0.6

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Solution Summary

Calculating the different effects on the GDP of changing government spending versus changing taxes.

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a. Expenditure multiplier 1/(1-MPC) =1/(1-0.9) = 10
==> A decrease in G will decrease GDP by ΔG * expenditure multiplier = (-10)(10) = - $100 billion

b. Expenditure multiplier 1/ (1-MPC) =1/(1-0.8) = 5
==> A decrease in G will decrease GDP by ΔG * expenditure multiplier = (-10)(5) = - $50 billion

c. Spending multiplier ...

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