Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Please verify that what I have is correct, and complete part D. ** Will Rate! ** Thank you!! A country is in the midst of
Please verify that what I have is correct, and complete part D.
**Will Rate!**
Thank you!!
A country is in the midst of a recession with real GDP estimated to be $5.4 billion below potential GDP. The government's policy analysts believe the current value of the marginal propensity to consume (MPC) is 0.90. Instructions: Enter numbers rounded to two decimal places. a. If the government wants real GDP to equal potential GDP, it should increase government spending by $ billion. Alternatively, it could reduce taxes by $ billion. b. Suppose that during the recession, people have become less confident and decide they will only spend 50% of any additional income. In this case, if the government increases spending by the amount calculated in part a, real GDP will end up potential GDP by $ billion. c. With the same decrease in consumer spending described in part b, if the government decreases taxes by the amount calculated in part a, then real GDP will end up 1 potential GDP by $ billion. d. Given your answers above, what can we conclude? When the government changes spending or taxes, it is easy to predict the exact impact on real GDP. If the government overestimates the value of the MPC, then its change in spending or taxes will be too large and real GDP will exceed potential GDP. If the government overestimates the value of the MPC, then its change in spending or taxes will be too small and real GDP will fall short of potential GDP. It is easy for the government to predict the value of the MPC prior to any changes in spending or taxes. A country is in the midst of a recession with real GDP estimated to be $5.4 billion below potential GDP. The government's policy analysts believe the current value of the marginal propensity to consume (MPC) is 0.90. Instructions: Enter numbers rounded to two decimal places. a. If the government wants real GDP to equal potential GDP, it should increase government spending by $ billion. Alternatively, it could reduce taxes by $ billion. b. Suppose that during the recession, people have become less confident and decide they will only spend 50% of any additional income. In this case, if the government increases spending by the amount calculated in part a, real GDP will end up potential GDP by $ billion. c. With the same decrease in consumer spending described in part b, if the government decreases taxes by the amount calculated in part a, then real GDP will end up 1 potential GDP by $ billion. d. Given your answers above, what can we conclude? When the government changes spending or taxes, it is easy to predict the exact impact on real GDP. If the government overestimates the value of the MPC, then its change in spending or taxes will be too large and real GDP will exceed potential GDP. If the government overestimates the value of the MPC, then its change in spending or taxes will be too small and real GDP will fall short of potential GDP. It is easy for the government to predict the value of the MPC prior to any changes in spending or taxesStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started