Q.4 Consider an economy described by the following parameters: `(8)

C=1000+0.8Yd

a)What is MPC of this economy?

Ans MPC = dc/dyd =0.8

b)What are simple multiplier and the tax expenditure multiplier?

Ans Simple multiplier =1/1-MPC =1/1-0.8 = 1/0.2 = 5

Tax Exp. Multiplier = -MPC/1-MPC = -0.8/1-0.8 = -4

c)How much government spending should be cut, if the required change in GDP is $1,000B?

AnsY =

d)How much taxes should be cut to change the GDP by $1,000B?

Ans: _____________