Fiscal Policy 1. Suppose the government finds out that the m…
Fiscal Policy 1. Suppose the government finds out that the marginal propensity to consume (mpc) is 0.80. If the government initially injected $5 billion of spending, what was the predicted effect on output after all spending cycles have been completed ? Assume that disposable income = income and show your work. (4) 2. When the government increased spending by $5 billion, they thought that the mpc was 0.80, but they were wrong. The mpc is actually 0.90. What was the actual effect on overall output (after all spending cycles)? Show your work (4) 3. What is one reason that could have caused the change in mpc from 0.75 to 0.90? (3) 4. What is the effect on the government budget position, inflation and unemployment of missing the mark? (4)
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