macroeconomics multiplier

Question

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? 

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? 

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? 

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? 

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? 

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, here is some help to get you started.

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? 

1. Because the problem is talking about calculating a tax increase, we need to calculate the tax multiplier and then divide the excess spending by the multiplier. Tax Multiplier = MPC/MPS . Remember that MPC = 1-MPS

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? 

1. Calculate the effect of both lowering taxes and increasing spending on the economy using MPS and MPC. Choose the most cost effective method given the mentioned criteria.