3. Suppose economists observe that an increase in government spending of 10 billion raises the total demand

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3. Suppose economists observe that an increase in government spending of €10 billion raises the total demand for goods and services by €30 billion.

a. If these economists ignore the possibility of crowding out, what would they estimate the marginal propensity to consume (MPC) to be?

b. Now suppose the economists allow for crowding out.

Would their new estimate of the MPC be larger or smaller than their initial one? Explain your answer.

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Business Economics

ISBN: 388402

2nd Edition

Authors: Mark P. Taylor, Andrew Ashwin, N. Gregory Mankiw

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