Question 1
Assume that the
MPC is 0.9. If government purchases increase by $100, equilibrium output ________; and if taxes increase by $100, equilibrium output ________.
◦ increases by $1,000; decreases by $1,000
◦ increases by $900; decreases by $1,000
◦ increases by $1,000; decreases by $900
◦ increases by $400; decreases by $400
Question 2
You are hired by the Council of Economic Advisors (CEA) as an economic consultant. The Chairperson of the CEA tells you that she believes the current unemployment rate is too high. The unemployment rate can be reduced if aggregate output increases. She wants to know what policy to pursue to increase aggregate output by $300 billion. The best estimate she has for the
MPC is 0.8. Which of the following policies should you recommend?
◦ Increase government purchases by $60 billion.
◦ Increase government purchases by $150 billion.
◦ Cut taxes by $60 billion.
◦ Cut taxes by $60 billion and to increase government purchases by $60 billion.
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