homework

2) Assume that a hypothetical economy with an MPC of .8is experiencing severe recession. By how much would governmentspending have to increase to shift the aggregate demandcurve rightward by $25 billion? How large a tax cut would beneeded to achieve this same increase in aggregate demand?Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplishthis same goal.Using the multiplier the real amount of increase of government spending can be found:
1/ MPS
= 1/.8
thus, the government needs to increase its spending by 5 billion dollars.
The MPS 0.8, only 80% of the tax will be spent
.8 x Tax Cut = 5 Billion
The tax should be cut by 6.25 billion dollars
There is a difference because there is MPS, people save their money which is not counted into the GDP.
3) What are government’s fiscal policy options for endingsevere demand-pull inflation? Use the aggregate demand-aggregatesupply model to show the impact of these policies onthe price level. Which of these fiscal policy options do you thinka “conservative” economist might favor? A “liberal” economist?
Fiscal policies that end demand pull inflation are reducing government spending and increasing taxes. Conservatives usually want to keep inflation very low, but liberals may want some inflation so the GDP has a chance to move out, which can make the economy grow.