Question

2. During the 1930s the U.S. entered the Great Depression. During the Great depression investment fell from a yearly rate of $16.7 billion to $1.7 billion. In 1932, President Hoover increased income taxes.  Assume the MPC is .8. All the following problems require mathematical calculations except part C).

a) What effect did the decline in investment have on AD?

b) Assume that Hoover increased income taxes by $10 billion. How it affects AD and therefore, the economy?

c) Given your answer to part b), do you think Hoover implemented the correct policy? Why?

d) Assume the AD shortfall in 1934 was $200 billion. What change in government expenditures on goods and services (G) would you have recommended restoring full-employment?

Answer 1