More Practice on the Multiplier Enter the values on Canvas of the following multipliers if I. mpc=0.975;t=0.375 2. mpc =0.6;t= 0.4 [Use four decimals] 3. mpc=0.7;t=1/3 [Note: 1/3 = 1/3, not 0.33] 4. mpc=2/3;t=1/3 [Note: 2/3 =2/3, not 0.66] Fiscal Policy in the Keynesian Model (Part I) For questions 5 through 12, assume the economy is at full employment (Y*). Also, suppose that mpc = 0.625 and t = 0.2. Fiscal policy consists of the government's choices of tax rates (t), transfer payments (TR), and spending on goods and services (G). Suppose the government increases government spending (G) by 50. 5. What is the corresponding change in equilibrium output (AYkq)? (a) 50 (b) 100 (c) 166.67 (d) 125 Suppose the economy is again at full employment (Y*). Then suppose a decline in business confidence reduces investment (I) by 100. 6. What is the impact (i.e., the change) of that shock on equilibrium output (find AYEq)? (a) -333.33 (b) -250 (c) -200 (d) -100 7. Which components of aggregate demand (AD)C, I, G, and/or NXincrease as a response to the shock from question 6, and by how much? (a) I falls by 100 (b) C falls by 100 (c) I falls by 100 and C, I, and G fall by some undetermined amount (d) Both (a) and (b) are right Suppose the government wants to respond to the recession caused by the decline in spending due to the drop in investment described for question 6 by using expansionary fiscal policy. That is, the government wants to restore Y* by increasing Y by the same amount as the decrease in Y found in question 6. For example, if Y in question 6 falls by 300 (don't use that number, it's made up), then the government would like to increase Y by 300 (i.e., AY = 300). 8. What must the government do, assuming it only uses government spending (G) to increase output by the amount it fell in question 67 (i.e., calculate the required AG, as done in class) (a) Increase G by 100 (b) Increase G by 200 (c) Increase G by 60 (d) Increase G by 250 9. How much is consumption rising as a consequence of the increase in government spending (G) from question 8? (a) C doesn't increase (b) C increases by 100 () C increases by 200 (d) Cannot be determined with the information provided 10. What must the government do, assuming that it instead uses only transfer payments (TR) to increase output back to full employment (Y*)? (i.e., calculate the required ATR, as done in class) (a) Increase TR by 100 (b) Increase TR by 96 (c) Increase TR by 200 (d) Increase TR by 160 11. How much is C rising as a consequence of the increase in TR from question 10? (a) C increases by 40 (b) C increases by 100 (c) C increases by 160 (d) C increases by 200 12. Is the required increase in TR to restore full employment (Y*) found in question 10 larger, lower, or equal to the required increase in G found in question 8? (a) Lower, as a stimulus, increases in G are stronger than increases in TR (b) Larger, people would spend only a fraction of the increase in TR, while the government would spend the entire amount AG (c) Equal, mathematically the impact of G on Y is the same as the impact of TR on Y (d) Lower, a dollar spent by the government is a dollar that raises Y