Question 1
Assume that the
MPC is 0.8. If government purchases increase by $500, equilibrium output ________; and if taxes increase by $500, equilibrium output ________.
◦ increases by $2,500; decreases by $2,000
◦ increases by $4,000; decreases by $3,000
◦ increases by $2,000; decreases by $1,000
◦ increases by $1,600; decreases by $1,200
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 $500 billion. The best estimate she has for the
MPC is 0.5. Which of the following policies should you recommend?
◦ increase government purchases by $200 billion
◦ increase government purchases by $250 billion
◦ cut taxes by $200 billion
◦ cut taxes by $200 billion and to increase government purchases by $200 billion
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