Answer to Question #123483 in Macroeconomics for C. Pratibhu

Question

In an economy with MPS=0.25 actual level of income is 6000 and desired level is 9000. Government expenditure cannot be raised. Tax is lump sum. Suggest a policy that will raise income to the desired level. [ 5 marks ]

Answer 1

The policy that will raise income to the desired level of 9000 is expansionary fiscal policy. The aim of this policy is to reduce unemployment by increasing government spending and /or decreasing taxes in order to increase aggregate demand and fuel economic growth