Assume an economy that consists of consumers, government, business investors, and an international sector. We will express this economy this way: C + I + G + X = GDP.

Assume the MPS is 0.2.

How much can we expect the economy to expand if government increases its spending by $300B and at the same time, Congress imposes a tax increase of the same amount ($300B) to pay for the increased spending and that tax increase causes C to fall by $240B? Show your work.

Hint: You have to calculate the multiplier and apply it appropriately. Determine the effect of the fall in C on GDP. Determine the effect of the increase in government spending on GDP. What is the net result?

Question

Assume an economy that consists of consumers, government, business investors, and an international sector. We will express this economy this way: C + I + G + X = GDP.

Assume the MPS is 0.2.

How much can we expect the economy to expand if government increases its spending by $300B and at the same time, Congress imposes a tax increase of the same amount ($300B) to pay for the increased spending and that tax increase causes C to fall by $240B? Show your work.

Hint: You have to calculate the multiplier and apply it appropriately. Determine the effect of the fall in C on GDP. Determine the effect of the increase in government spending on GDP. What is the net result?

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