Question

Question. Suppose that the US economy is down by exactly 800 billions from its February 2020 level. Assume that the marginal propensity to consume is 0.75, and the government decides to actively interne in order to move back the economy to its February level.

      a) By how much should he government increase both government spending and taxes to move the economy by exactly 800 billions with a balanced budget?

      b). By how much should the government increase government spending to reach the same goal without increasing taxes.

      c) Between the two choices above in (a) and (b), which one is more reasonable for the current state of our economy? Why?

Answer 1

c)

Part a position is more reasonable at this movement

Because reduction in taxes will increase income which will increase consumption

While government spending will increase AD by increasing investment

Due to pandamic both consumption and investment has hit