Answer to Question #100064 in Macroeconomics for Tiffany

Question

3. In Country X, GDP is $400B below the full-employment level of output. Government officials have measured the marginal propensity to consume at 0.75.

a. The government wants to use fiscal policy to bring the economy back to full employment.

(i) If the government wants to achieve this through a change in spending, what change would be necessary?

(ii) If the government wants to achieve this through a change in taxes, what change would be necessary?

(iii) If the government wants to achieve this without creating a budget deficit, what change would be necessary?

Answer 1

a.

(i) If the government wants to achieve this through a change in

spending, then the increase in government purchases would be necessary.

(ii) If the government wants to achieve this through a change in

taxes, then the decrease in taxes would be necessary.

(iii) If the government wants to achieve this without creating a

budget deficit, then it should increase government purchases and increase taxes.