assume that a hypothetical economy with an mpc of 08 is experiencing severe recession a by how m

A) To shift the aggregate demand curve rightward by $25 billion, we need to calculate the change

Assume that a hypothetical economy with an mpc of 08 is...

Assume that a hypothetical economy with an MPC of 0.8 is experiencing a severe recession. A) By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Instructions: Round your answer to 2 decimal places and enter your answer as a positive number. Tax cut = ? (billion) B) Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt. Increase government spending by (?) billion. Increase taxes by (?) billion.

Transcript

00:01 Assume that a hypothetical economy with marginal propensity to consume of 0 .8 is experiencing extreme recession.

00:12 Okay.

00:13 So what does it mean when mpc is equal to 0 .8? that means that for every $1 of increase in pay, a consumer will spend 80 % of it.

00:33 So 80 % goes to spending in this economy.

00:38 Economy.

00:40 Okay, so back to the problem.

00:42 But how much will government spending have to rise to shift the aggregate demand curve rightward by $25 billion? okay, so we remember the formula for aggregate demand.

00:56 It's consumer consumption plus investment spending plus government spending plus net exports.

01:05 So the answer to part a is $25 billion.

01:08 An increasing government spending of $25 billion will increase the real economy, $25 billion.

01:16 Question b, how large a tax cut would be needed to achieve the same increase in aggregate demand? ron, your answer to two decimal places and entry your answer is a positive number.

01:27 Okay, so the tax cut is going to need to be bigger than $25 billion, since consumers will save 20 % of every dollar they earn.

01:37 So we're going to do $25 billion divided by $0 .8.

01:41 And that gives us $31 .25 billion.

01:53 Now, why did i divide? basically because the marginal propensity consumed was 0 .8.

02:02 The formula we use is aggregate demand shift divided by marginal propensity to consume is tax cut needed.

02:15 Okay, so that's part b.

02:18 Now, part c, determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of debt.

02:33 So we need to increase government spending by some amount and increase taxes by some amount.

02:38 Okay.

02:40 So we're going to increase government spending.

02:44 We already know by $25 billion.

02:59 And this time we're going to increase taxes by $32.

03:05 Now what that does, so what's going to happen? so gdp is going to go up by 25 billion and okay, so we don't want to change debt.

03:52 So just to show you real quick, let me back up just a bit...