Purchase Solution

# a spending multiplier question

Not what you're looking for?

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

##### 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

##### Solution Preview

This is a spending multiplier question.
<br>the government spending multiplier = 1 / 1 - MPC
<br>a) While the MPC is 0.9, multiplier =1/(1-0.9)=10
<br>And from &#916;Y / &#916;G = multiplier
<br>We get&#916;Y=&#916;G* multiplier = 10*10 = 100 billion
<br>
<br>b. MPC = 0.8, multiplier =1/(1-0.8)=5
<br>And from ...

##### Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

##### Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

##### Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

##### Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

##### Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.