Please help with the following problem.
Assume the government raises taxes by $20 billion and at the same time increases government spending by $20 billion. If the marginal propensity to consume (mpc) = 0.9 and everything else stays constant, according to the expenditure approach we can surmise that the level of income will
a. increase by $200 billion
b. decrease by $200 billion
c. decrease by $20 billion
d. increase by $20 billion
This question requires an understanding of the so-called "Tax Multiplier" and the "Government Purchases Multiplier".
Both these concepts are based on the marginal propensity to consume (MPC). The idea is that if the government spends money ...
The solution goes into a great amount of detail about using the balanced budget multiplier. The solution does not only provide the answer to the question but also explains the process to arrive at the answer. Detailed steps are provided for everything. The response is very well written and easy to understand as well. Overall, an excellent response.