Question 4 In a simple Keynesian model, assume that the marginal propensity to consume (MPC) is...

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Question 4 In a simple Keynesian model, assume that the marginal propensity to consume (MPC) is 0.5. a) Find the government purchases multiplier b) Find the tax multiplier c) If the government wants to increase equilibrium real GDP by $ 500 billion, how much should the government increase spending? d) For the same purpose, how much should the government decrease taxes? According to Ricardian equivalence, do you think the government estimate is correct (should the government decrease taxes or not)? Why or why not? e) Use your answers from a) and b): If government chases are increased by $20 billion and at the same time taxes are increased by $20 billion (taxes are increased to finance the government expenditure), find changes in GDP and the balanced budget multiplier (the net effect). Question 4 In a simple Keynesian model, assume that the marginal propensity to consume (MPC) is 0.5. a) Find the government purchases multiplier b) Find the tax multiplier c) If the government wants to increase equilibrium real GDP by $ 500 billion, how much should the government increase spending? d) For the same purpose, how much should the government decrease taxes? According to Ricardian equivalence, do you think the government estimate is correct (should the government decrease taxes or not)? Why or why not? e) Use your answers from a) and b): If government chases are increased by $20 billion and at the same time taxes are increased by $20 billion (taxes are increased to finance the government expenditure), find changes in GDP and the balanced budget multiplier (the net effect).

Answer rating: 100% (QA)

To solve these questions well use the basic formulas from Keynesian economics The government purchases multiplier is defined as textMultiplier 11 MPC ... View the full answer