a spending multiplier question

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Assume that government purchases decrease by $10 billion, with other factors held constant. Calculate the change in the level of real DGP 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 Preview

This is a spending multiplier question.
 the government spending multiplier = 1 / 1 - MPC
 a) While the MPC is 0.9, multiplier =1/(1-0.9)=10
 And from ΔY / ΔG = multiplier
 We getΔY=ΔG* multiplier = 10*10 = 100 billion
 
 b. MPC = 0.8, multiplier =1/(1-0.8)=5
 And from ...

Solution Summary

Calculate the change in the level of real DGP 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

$2.49