Government spending

Why does a reduction in taxes have a smaller multiplier effect than an increase in government spending of an equal amount?

Suppose you are an economic adviser to the president and the economy needs a real GDP increase of $500 billion to reach full-employment equilibrium. If the marginal propensity to consume (MPC) is 0.75 and you are a Keynesian, by how much do you believe Congress must increase government spending to restore the economy to full employment?

If no fiscal policy changes are made, suppose the current aggregate demand curve will increase horizontally by $1,000 billion and cause inflation. If the marginal propensity to consume (MPC) is 0.80, federal policymakers could follow Keynesian economics and restrain inflation by decreasing

a. government spending by $200 billion.
b. taxes by $100 billion.
c. taxes by $1,000 billion.
d. government spending by $1,000 billion

If the equilibrium level of real GDP is $100,000 below the full-employment level of real GDP and the spending multiplier is 4, how much of an increase in autonomous aggregate expenditures (such as government spending) is required to move the equilibrium to the full-employment level of real GDP?

a. $400,000.
b. $200,000.
c. $100,000.
d. $25,000.
e. $10,000.

Solution: