If the MPC is .90 and the government spends $400 Billion dollars, what is the multiplied effect on GDP? 1/1-MPC = 10; $400/10 = $4,000 Billion.

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Presentation transcript:

If the MPC is .90 and the government spends $400 Billion dollars, what is the multiplied effect on GDP? 1/1-MPC = 10; $400/10 = $4,000 Billion

-MPC/1-MPC = -.7/.3 = -2.33; -2.3 x $600B = $1,398 Billion Decrease 2. If the MPC is .70 and the government increases taxes by $600 Billion dollars, what is the multiplied effect on GDP? -MPC/1-MPC = -.7/.3 = -2.33; -2.3 x $600B = $1,398 Billion Decrease

MPC/1-MPC = .85/.15 = 5.67; 5.67 x $375B = $2,126.25B increase in GDP. 3. If the MPC is .85 and the government decreases taxes by $375 Billion, what is the multiplied effect on GDP? MPC/1-MPC = .85/.15 = 5.67; 5.67 x $375B = $2,126.25B increase in GDP.

4. If the government increases spending by $200 Billion and simultaneously increases taxes by $200 Billion to pay for it, what is the effect on real GDP? Why? $200 Billion increase in GDP. Why? Because government spending affects the economy (circular flow) faster than taxes and the multiplied effect equals one. This is a Balanced Budget Multiplier question. The formula is 1 x the amount of Government Spending.

5. If a recessionary gap equals $500 Billion and the MPC equals 5. If a recessionary gap equals $500 Billion and the MPC equals .75, how much should the government spend to close this gap? 1/1-MPC = 4; $500/4 = $125 Billion 6. If an inflationary gap equals $500 Billion and the MPC equals .75, how much should taxes increase to close this gap? -MPC/1-MPC = -3; $500 Billion/3 = $166.67 Billion Increase in Taxes.

B = the change in Government Spending or Taxes Add this formula to your list: A x B = C where: A = The Multiplier B = the change in Government Spending or Taxes C = either the overall change in real GDP or the Gap (recessionary or inflationary)