Question

An economy is initially at full employment, but a decrease in planned investment spending (a component of autonomous expenditure) pushes the economy into recession. Assume that the marginal propensity to consume (mpc) of this economy is 0.75 and that the multiplier is 4 a. How large is the recessionary gap after the fall in planned investment? The recessionary gap is times the size of the fall in planned investment. b. By how much would the government have to change its purchases to restore the economy to full employment? The (Click to select) 4in purchases should be (Click to select) 4 the fall in planned investment. c. Alternatively, by how much would the government have to change taxes? Instruction: Round your response to the nearest whole percent. The government would have to (Click to select) 4 taxes by an amount that is (Click to select) A the decline in planned investment. percent d. Suppose that the government's budget is initially in balance, with government spending equal to taxes collected. A balanced-budget law forbids the government from running a deficit. Is there anything that fiscal policymakers could do to restore full employment in this economy, assuming they do not want to violate the balanced-budget law? Decrease government spending and increase taxes by the same amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget. Decrease taxes while increasing government spending by a greater amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget. Increase both government spending and taxes by the same amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget. Decrease both government spending and taxes by the same amount, which ll result in a net increase in autonomous expenditure without offsetting the balanced budget

Answer 1

a. The recessionary gap is 4 times the size of the fall in planned investment.

b. The increase in purchases should be equal to the fall in planned investment.

c. The government would have to reduce taxes by an amount that is 33 percent greater than the decline in planned investment.

d. Increase both government spending and taxes by the same amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget.