question archive 1)Data for the simple economic of Newt show that in 2018, saving exceeded investment and the government is running balanced budget
1)Data for the simple economic of Newt show that in 2018, saving exceeded investment and the government is running balanced budget
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1)Data for the simple economic of Newt show that in 2018, saving exceeded investment and the government is running balanced budget. What is likely to happen? What would happen if the government were running a deficit and saving were equal to investment?
a. MPS=0.1. What is the government spending multiplier?
b. MPC=0.6. What is the government spending multiplier?
c. MPS= 0.25. What is the government spending multiplier?
d. MPC= 0.5. What is the tax multiplier?
e. MPS = 0.2. What is the tax multiplier?
f. If the government spending multiplier is 8, what is the tax multiplier?
g. If the tax multiplier is -5, what is the government spending multiplier?
h. If government purchases and taxes are increased by $500 billion simultaneously, what will the effect be on equilibrium output (income)?
3)what is the balance -budget multiplier? explain why the balance - budget multiplier is equal to one.
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1 Economy will contract since AD<AS
However if the government were running a deficit and saving were equal to investment, there will be expansion in economy as AD>AS
2 it= 1/mps= 1/0.1=10
3 = 1/1-mpc= 1/1-0.6=1/0.4= 2.5
4 1/0.25=4
5 =1/1-0.5=2
6 =1/0.2=5
7 it means
1/1-mpc= 8
Or
1/8=1-mpc
Or mpc= 1+0.125=1.125
So tax multiplier = - mpc/1-mpc
= - 1.125/1-1.125= 9
8 this means
-mpc/1-mpc= 5
Or - mpc= 5-5mpc
4mpc= 5
Mpc= 5/4= 1.25.
So govt expenditure multiplier
= 1/1-1.25=4
9 There will be increase in income due to balance budget multiplier effect
10 it is a multiplier effect on national income resulting from equal increase in govt expenditure and increase in taxes
It us equal to one since while govt expenditure raises aggregate demand by full amount, taxes don't result in fall in consumption by an amount equal to increase in taxes. This is because mpc is less than 1. As income falls, people don't reduce consumption by full amount of fall in income due to tax.
