Macroeconomics Multiplier

Question

Directions: The Multiplier! 

1. If disposable income is $900 billion when the average propensity to consume is .9, it can be concluded that savings is __90____ billion. 
2. If a family’s MPC .7, it is spending __70_____ % of it’s income on consumer goods. 
3. If you know that an increase in household’s disposable income from $35,000 to $45,000 leads to an increase in consumption from $30,000 to $38,000 then you can conclude that the MPC is…Marginal propensity to consume is 0.8
4. If Sara’s disposable income increases from $4,000 to $4,500 and her level of savings increases from $200 to $325 it may be concluded that her marginal propensity to consume is… 0.75
5. In a closed economy where the MPC is .8 what change in investment is required to reduce domestic output by $60 billion? 
6. If a lump sum tax of $40 billion is levied and the MPS is .25 then the savings schedule will increase or decrease? 
7. The federal government raises taxes by $100 billion and has a MPC of .5. Explain what will happen to GDP. 
8. The federal government decides to tax the public for health care. The MPS is .25. The cost of the tax will be $800 billion. What will be the result in the economy?
9. The federal government is going to increase spending by $100b and tax the economy by an equal amount. What will happen to GDP? 
10. The recessionary gap is $200b. How much government spending needs to be spent in order to eliminate the gap? 

Can you multiply and correct the economy? Or are you too scared ?

1. The economy is at $200,000 and full-employment is at $250,000. The MPC is .80. How much money must be spent by the government or investment to reach full-employment? 
2. The economy is an inflationary gap at $300,000. Full-employment is at $280,0000. The MPC is .75. How much spending cuts need to be made to bring the economy to reach FE? 
3. The economy is in a recession at $180,000 and the FE is at $200,000 and the MPC is .9. How much spending needs to occur for the economy to reach FE? 
4. The economy is at $400,000 and the MPC is .5. Full-employment is at $500,000. How much spending needs to occur? 
5. The US has disposable income of $900b. It has been calculated that the MPC of the USA is .9. The MPS for the USA is? 
6. If a family’s MPC is .7 it is spending what percentage of its income on consumption? 
7. Should this family spend more than this percentage in order to help the overall economy? 
8. Joey Donut’s Disposable income has risen from $35,000 to $45,000 and this leads to an increase in consumption from the Donut’s household from $30,000 to $38,000 per year. Therefore, we can conclude the MPC is ______ and the MPS is ______. 
9. A closed economy has an MPC of .5. What change in government spending is needed to reduce output by $60 billion? 
10. Congress passed a tax increase of $40b and the MPS is .2. What will the overall reduction in GDP for this economy be? 
11. There is a recessionary gap of $100m, there is an MPS of .1, by how much must the gov’t increase spending to eliminate the gap? 
12. The federal gov’t decided to create a tax to curb inflation. They know that the MPS is .25 and they need to curb the economy of excess spending by $270 billion. How large a tax increase must be made to eliminate the $270 billion? 
13. You believe that the economy has a potential GDP of $4 trillion and is currently at $3 trillion. The MPS is .5. What is your solution? 
14. The government has decided to tax the population $200, which has an MPC of .67, and to spend this $200. What will be the result? Show all work and explain? 
15. The gov’t needs to decide whether to spend $50m or release the money as a tax refund for the public. What will serve to increase the GDP greater? Why? 
16. The economy is at full-employment and the government will spend $500b on missile launchers. With an MPC at .8, what will the result of this expenditure be? 
17. The economy is in a recession of $100 billion and the government will spend $100 billion on paying people to dig ditches and then fill them back up. With an MPS of .1, what will the result of this expenditure be?

Answer 1

Here are a few comments to get you started.

1. In a closed economy where the MPC is .8 what change in investment is required to reduce domestic output by $60 billion? 
2. You will need to calculate the spending multiplier (1/MPS). Then the total desired reduction in domestic output by the multiplier.
3. If a lump sum tax of $40 billion is levied and the MPS is .25 then the savings schedule will increase or decrease? 
4. If a tax is levied, savings will increase
5. The federal government raises taxes by $100 billion and has a MPC of .5. Explain what will happen to GDP. 
6. Calculate the Tax Multiplier (-MPC/MPS). Then multiply the result by the amount the government raises taxes by. Implementing taxes has a negative affect on total output.
7. The federal government decides to tax the public for health care. The MPS is .25. The cost of the tax will be $800 billion. What will be the result in the economy?
8. Calculate the tax multiplier. Multiply the multiplier by the total cost of the tax.