Suppose an economy is initially in equilibrium at its potential output level. As a result of an unexpected crisis in the financial markets, the AD curve suddenly shift to the left by a horizontal distance equal to $140 billion. Suppose the government has decided to restore the economy to its initial level of output by simultaneously increasing its spending and increasing taxes (so that it does not run into a deficit). Assuming the marginal propensity to consume in this economy is 0.25, by how much must the government increase its spending (and taxes) to achieve its goal? (Calculate your answer in billions of CAD, round it to one decimal places, and write it without units. E.g., write 1.0 for $1 billion.

Suppose an economy is initially in equilibrium at its potential output level. As a result of an unexpected crisis in the financial markets, the AD curve suddenly shift to the left by a horizontal distance equal to $140 billion. Suppose the government has decided to restore the economy to its initial level of output by simultaneously increasing its spending and increasing taxes (so that it does not run into a deficit). Assuming the marginal propensity to consume in this economy is 0.25, by how much must the government increase its spending (and taxes) to achieve its goal? (Calculate your answer in billions of CAD, round it to one decimal places, and write it without units. E.g., write 1.0 for $1 billion.

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter15: Fiscal Policy

Section: Chapter Questions

Problem 6SQ

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Suppose an economy is initially in equilibrium at its potential output level. As a result of an unexpected crisis in the financial markets, the AD curve suddenly shift to the left by a horizontal distance equal to $140 billion. Suppose the government wants to combat the resulting recession by increasing its spending. Assuming the marginal propensity to consume in this economy is 0.25, by how much must the government increase its spending to restore the economy to its initial level of output? (You can ignore the fact that the government must somehow finance the resulting budget deficit.) (Calculate your answer in billions of CAD, round it to one decimal places, and write it without units. E.g., write 1.0 for $1 billion.)
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Suppose a closed economy with no government spending which in equilibrium is producing an output and income of 2250. Suppose also that the marginal propensity to consume is 0.75, and that, if at full employment, the economy would produce an output and income of 3050 By how much would the government need to cut taxes (T) to bring the economy to full employment?
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