Question

If the economy were in a 4 trillion dollar recessionary gap, and the multiplier were 2,...

If the economy were in a 4 trillion dollar recessionary gap, and the multiplier were 2, then to close the gap

A. the increase in spending would have to be greater than the decrease in taxes

B. the gap could be closed by a 2 trillion dollar increase in spending or a 2 trillion dollar decrease in taxes.

C. the debt would get larger from a decrease in taxes than an increase in spending.

D. none of the above are true.

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Homework Answers

Answer #1

Multiplier =1/(1-MPC

2=(1/(1-MPC)

2-2MPC=1

2MPC=1

MPC=0.5

Tax multipliers =-MPC/(1-MPC)

=-0.5/(1-0.5)

=-1

-------------

The required change in spending =gap/multiplier

the required change in spending =4/2

=2 trillion

the spending should be increased by $2 trillion to cover it

-------

The required change in taxes =4/(-1)=-4

the required change in taxes is -$4 trillion

the taxes should be decreased by $4 trillion to cover it.

---------

The increase in spending, increase debt by $2 trillion

the decrease in taxes increases the debt of $4 trillion

option C is correct.

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