Consider the following sets of values for MPC, (t), and (m), and recall that the simple multiplier
Question:
Consider the following sets of values for MPC, \(t\), and \(m\), and recall that the simple multiplier is given by \(1 /\) \([1-M P C(1-t)-m]\). Assume the \(A S\) curve is upward sloping and identical in each economy.
a. For each economy, calculate the simple multiplier.
b. Which economy would experience the largest swings in real GDP in response to a given \(A D\) shock? Which would experience the smallest swings?
c. Explain why the change in real GDP in response to an \(A D\) shock would not be solely determined by the simple multiplier for each of these economies.
d. Compare Economies A and B and explain how the tax-and-transfer system provides greater automatic stabilization in one of the two economies.
e. Explain how the slope of the \(A S\) curve would affect the short-run change in real GDP in response to an \(A D\) shock.
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