Question

Fully explain whether each of the following events would lead to an increase, a decrease, or no change in the level of real GDP or output:

a. A decrease in government purchases
b. An increase in net taxes
c. A reduction in transfer payments
d. A decrease in the marginal propensity to consume
In 2009, Congress approved the cash for clankers, a program that was designed to provide economic incentives to U.S. residents to purchase a new and efficient car. In your own analysis, do you think the cash for clankers helped the economy, if yes, how and if no, why not?

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1) A decrease in government purchases will lead to a decrease of real GDP. This is due to the decrease in disposable income and thus decreasing consumer spending.

2) An increase in net taxes would decrease the level of GDP. This is correct since increasing taxes will decrease the amount of money consumers have to consume new products or services, therefore decreasing spending and reducing GDP....

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