Question

1. Calculate and graph what happens to G, AD, GDP, and Prices if the government increases government spending by 100 billion and the MPC = .80.

2. Calculate and graph what happens to T, C, AD, GDP, and Prices if the President raises taxes by 100 billion and the MPC = .80.

3. Calculate and graph what happens to AD, GDP and Prices if the government raises both taxes and government spending by 200 billion and the MPC is equal to .75.

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Solution:

In this, the G would increase by $100 billion.

Changes in AD are calculated using Government spending multiplier.

Change in AD = Change in G * (1/(1- MPC)) = $100 billion * (1/(1 – 0.80)) = $500 billion.

This new AD curve would intersect the aggregate supply curve at a further point since the AD curve would shift to the right. This would also cause the GDP and prices...

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