Macroeconmics multiplier

Question

1. 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 ______. 
2. A closed economy has an MPC of .5. What change in government spending is needed to reduce output by $60 billion? 
3. Congress passed a tax increase of $40b and the MPS is .2. What will the overall reduction in GDP for this economy be? 
4. 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? 
5. 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? 
6. 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? 
7. 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? 
8. 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? 
9. 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? 
10. 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

Hi Max, this should get you started on the first few.

1. 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 ______. 
2. Most indicators that have the term marginal relate to change. Marginal indicates what is needed to produce the next unit. To have a next unit, there must be a first unit.
3. MPC = Change in Consumption/Change in Disposable Income. MPS = Change in Savings/Change in Disposable Income or 1-MPC.
4. A closed economy has an MPC of .5. What change in government spending is needed to reduce output by $60 billion? 
5. Here you will need to calculate the spending multiplier (1/MPS). Then, because you are trying to find how much the government will need to spend to induce an output reduction of 60 billion, you must divide the change in total output by the multiplier. You will get a number less than 60 billion. Try to think about why this makes sense.
6. Congress passed a tax increase of $40b and the MPS is .2. What will the overall reduction in GDP for this economy be? 
7. Here you will need to calculate the tax multiplier (-MPC/MPS). Then, because you are trying to find the overall reduction in GDP from the government's tax increase you must multiply the tax increase by the multiplier. You will get a number more than 40 billion. Try to think about why this makes sense.
8. 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? 
9. Here you will need to calculate the spending multiplier. Now you are trying to find how much the government needs to increase spending... what would you do?
10. 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? 
11. Here you will need to calculate the tax multiplier. Now you are trying to find how much the government needs to increase taxes... what would you do?
12. 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? 
13. If the government is trying to increase GDP, they will either need to lower taxes or increase spending. They want to increase GDP by $1 trillion($4 trillion - $3 trillion), calculate either the spending or tax multiplier and divide the desired increase in GDP by it.