If the marginal propensity to consume is 0.75, how much...

If the marginal propensity to consume is $0.75,$ how much would government spending have to rise to increase output by $\$ 1,000$ billion? How much will taxes need to decrease to increase output by $\$ 1,000$ billion?

Key Concepts

Marginal Propensity to Consume (MPC)

The marginal propensity to consume measures the portion of any additional income that households spend on consumption rather than saving. It is a key behavioral parameter in macroeconomic models and plays a crucial role in determining the size of fiscal multipliers, since higher consumption leads to a greater effect on overall economic output.

Government Spending Multiplier

The government spending multiplier quantifies the change in economic output that results from a change in government spending. It is calculated as 1 divided by the marginal propensity to save (which is 1 minus the MPC), showing how initial government expenditures can lead to successive rounds of increased spending and output across the economy.

Tax Multiplier

The tax multiplier measures the impact of a change in taxes on the overall output of the economy. Unlike the government spending multiplier, it is generally smaller in absolute value because the effect of a tax cut on consumption depends on the marginal propensity to consume. It reflects the idea that when taxes change, only part of this change affects disposable income and subsequent spending, thus having a more muted effect on aggregate demand.

Transcript

00:01 So while seeing the question, let's further move to the answer.

00:03 So let's see here that the marginal propensity to consume is 0 .75.

00:25 The amount of increase required in autonomous spending to increase the output by $1 ,000 billion is required to be found out.

01:36 So calculate the required increase in autonomous spending as follows.

02:18 Required increase in autonomous spending is equal to.

02:40 Required increase in output by autonomous spending multiplier, which is equal to $1 ,000 billion by 1 by 1 minus mpc, which is equal to $1 ,000 billion, 1 minus mpc, which is equal to $1 ,000 billion, $1 ,000 billion, dollar 0 .25 which is equal to 250 billion dollars so therefore the amount of increase required in autonomous spending to increase the output by 1000 billion dollars is 250 billion dollars so the amount of decrease in decrease the output by 1 ,000 billion dollars and is required to be found out calculate the required decrease in tax as follows so required decrease in autonomous spending is equal to required increase in output by minus tax multiplier which is equal to $1000 billion by minus mpc by 1 minus mpc which is equal to $1 ,000 billion, 1 minus mpc by mpc which is equal to $1 ,000 billion 1 minus 0 .75 by 0 .75 which is equal to $1 ,000 billion by 0 .25 which is equal to $1 ,000 billion 333 .33 billion dollars.

10:11 So therefore the amount of decrease required in taxes to increase the output by 1000 billion dollars is 33 .33 billion dollars.

11:13 So here is the full solution of the question.

11:16 So here is the marginal propensity to consume 0 .2, 0 .75.

11:22 The amount of increase required in autonomous spending to increase the output by $1 ,000 billion is required to be found out.

11:30 So calculate the required increase in autonomous spending as follows...

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