8. Assume that MPC = 0.9. If G increases by $100 billion and T increases by $100 billion, the equilibrium GDP ___ by $___ billion.
A. increases, 0 B. increases, 100
C.decreases, 100 D. decreases, 10
9. Assume that MPC = 0.9. In order to increase the equilibrium GDP without changing the government budget deficit or surplus, we should ___ G by $100 billion and ___ T by $100 billion.
A. increase, increase B. increase, decrease
C.decrease, increase D.decrease, decrease
Could someone explain to me what the answers would be and why? Thanks!
8. If G and T both increases by $100 billion and MPC= 0.9 ,
Then ,change in GDP by increase in G = 1/1-MPC (100) = (1/1-0.9 )(100) = 100/0.1 = 1000
Change in GDP by increase in T = (-MPC/ 1- MPC )(100) = (-0.9/ 1- 0.9) (100) =( -0.9/0.1 )/100 = -90 /0.1 = -900.
Therefore, the total change in GDP = 1000 -900 = 100 billion.
It implies that GDP increases by $100 billion. Hence, option (B) is correct.
9. When G increases by $100 billion and T increases by $100 billion.Then , there will be increase in equilibrium GDP by $100 billion but there is no change in budget . Because the increase in amount of G and T by the same amount, is called the balanced budget. Increase in G will compensate the increase in T.
Hence, option (A) is correct.
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