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Assume an economy consisting of a consumption sector, a government sector, a foreign sector, and a business investment sector. (C + I + G + X = GDP). Also, assume that the Marginal Propensity to Save (MPS) = 0.2. If government spending increases by $70B and taxes also increase by $70B.

A) consumption will fall by $56B, but GDP will increase by $70B

B) consumption will fall by $70B and GDP will remain the same

C) consumption will fall by $350B and GDP will increase by $350 so the net effect is $0

D) GDP will increase $350B

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Insha Fatima
Insha FatimaLv10
28 Sep 2019

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Related questions

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 that the MPS is 0.3. How much can we expect the economy to expand if the government increases its spending by $100B and at the same time, Congress imposes tax increases of the same amount ($100B) to pay for the increased spending and that the tax increase causes C to fall by $70B?

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? 

1. Assume an economy with a Household Sector and a Business Sector. Household spending is given by C= 400 + 0.9Qd. Since there is no public sector, Qd = Q. Business sector spending is given as I = 1300. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Consumption Spending (C) and Household Savings.

2. Now add a Foreign Sector where Exports are X = 1000 and Imports are Im = 500 + 0.1Q. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Imports, Net Exports, Consumption Spending (C) and Household Savings.

3. Now add a public sector where Government Purchases are G = 2000, Transfer Payments are Tr = 2500 and Taxes are Tx = 500 + (1/3)Q. With the public sector Disposable Income is Qd = Q - Tx + Tr. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Imports, Net Exports, Taxes, Disposable Income, Consumption Spending (C), Household Savings and the Deficit.

Please explain what each equation represents in the answer.

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