Mcconnell, Brue and Flynn Macroeconomics

Chapter 13 / Problems pg 286

I would like a review, I am awful with math and equations, I want to make sure I am doing this right before turning in. Thank you!

(I've included a picture of the question from the book, I am only required to answer A and B for problem #3)

lems enacting and applying fiscal policy as being an example government and firms are still borrowing a lot. d. There is a crowding-out effect of $25 billion. PROBLEMS 1. Assume that a hypothetical economy with an MPC of .8 is ex- periencing severe recession. By how much would government GDP, Consumption, Billions Billions spending have to rise to shift the aggregate demand curve right- ward by $25 billion? How large a tax cut would be needed to $ 100 $120 achieve the same increase in aggregate demand? Determine 200 200 one possible combination of government spending increases 300 280 and tax decreases that would accomplish the same goal. 400 360 LO13.1 500 440 2. Refer back to the table in Figure 12.7 in the previous chapter. 600 520 Suppose that aggregate demand increases such that the amount 700 600 of real output demanded rises by $7 billion at each price level. By what percentage will the price level increase? Will this in- a. Graph this consumption schedule. What is the size of the flation be demand-pull inflation or will it be cost-push infla- MPC? tion? If potential real GDP (that is, full-employment GDP) is b. Assume that a lump-sum (regressive) tax of $10 billion is $510 billion, what will be the size of the positive GDP gap af- imposed at all levels of GDP. Calculate the tax rate at each ter the change in aggregate demand? If government wants to level of GDP. Graph the resulting consumption schedule use fiscal policy to counter the resulting inflation without and compare the MPC and the multiplier with those of the changing tax rates, would it increase government spending or pretax consumption schedule. decrease it? LO13.1 c. Now suppose a proportional tax with a 10 percent tax rate is 3. (For students who were assigned Chapter 11) Assume that, imposed instead of the regressive tax. Calculate and graph without taxes, the consumption schedule for an economy is as the new consumption schedule and note the MPC and the shown below: LO13.1 multiplier