Q.1 - ProblemsExpert-verified
Assume that equilibrium real GDP is $ 18.2 trillion and full-employment equilibrium (F E) is $ 18.55 trillion. The marginal propensity to save is . Answer the questions using the data in the following graph.
a. What is the marginal propensity to consume?
b. By how much must new investment or government spending increase to bring the economy up to full employment?
c. By how much must government cut personal taxes to stimulate the economy to the full employment equilibrium?
b. By billion
c. By billion
Marginal Propensity to consume is the proportion of expansion in utilization because of progress in Income. Marginal Propensity to save is the proportion of expansion in saving because of progress in Income.
Marginal Propensity to save =
Marginal Propensity of consume + Marginal Propensity of Save =
Hence Marginal Propensity to consume =
Real GDP at full employment = trillion
Real GDP at present = trillion
Change in real GDP
new investment or government spending increases to billion bring the economy up to full employment
change in real GDP =
The government must cut personal taxes by billion to stimulate the economy to the full employment equilibrium.
Recall that the Keynesian spending multiplier equals 1 /(1-MPC). Suppose that in panel (b) of Figure 13-1, the government knows that the MPC is equal to 0.75 and that the amount of the horizontal distance that the AD curve had to be shifted directly leftward from point E1 was equal to $1.0 trillion. What is the reduction in real government spending required to have generated this shift?
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