Answer to Question #60383 in Macroeconomics for Alex

Question #60383
Assuming that the MPC=.75 and that prices are constant, which of the following fiscal policies would eliminate a recessionary gap of $60 billion maintaining a balanced budget? A. Decreasing government spending by $60 billion while raising taxes $80 billion B. Increasing government spending by $60 billion while reducing taxes $80 billion C. Increasing government spending by $60 billion while raising taxes $60 billion D.Decreasing government spending by $60 billion while reducing taxes $60 billion E. Increasing government spending by $60 billion while raising taxes $80 billion If the economy is near the full-employment level of output the AD/AS analysis of a change in government spending or taxation will be different from the Keynesian analysis. T or F
1
Expert's answer
2016-06-17T09:54:03-0400
C. Increasing government spending by $60 billion while raising taxes $60 billion
multiplicator of government spending=1/MPS=1/(1-MPC)=1/(1-0.75)=4
multiplicator of taxes=-MPC/MPS=-MPC/(1-MPC)=-0.75/(1-0.75)=-3
Increasing government spending by $60 billion will increase GDP by 60*4=240 billion while raising taxes $60 billion will decrease GDP by 60*3=180 billion.aise
As a result, GDP will raise by 60 billion.

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