Question

Assume the government cuts taxes by $200 billion. If the MPC is 0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model? 

• Real GDP increases by $1,000 billion 

• Real GDP Increases by $800 billion 

• Real GDP decreases by 51.000 billion 

• Real GDP decreases by 5000 button

• 
  

In Keynesian theory, if the marginal propensity to consume is 0.90 and government spending is increased by $50 billion, then real income (GDP) will maximum of billion by a 

decrease: $500 

decrease $50 

Increase: $500  

Increase: $50

Answer 1

Answer:

Q 1. Real GDP increases by $1,000 billion

reason: When government cuts taxes, there is more disposable income in the hands of the consumers, and they spend more, increasing aggregate demand, and thereby real GDP. This increase depends on the multiplier:1/(1-MPC) = 1/(1-0.8) = 5. So the change in the real GDP = 200*5 = 1,000 billion dollars.

Q 2. increase; $500

reason: When government increases spending, it creates more demand, and the Aggregate demand increases. The extent of the increase depends on the multiplier: 1/(1-0.9) = 10. So, increase in real GDP = 50* 10 = 500 billion dollars.