Thread: Economics help!
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      04-14-2011, 11:16 PM   #1
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Economics help!

I am totally lost. A little help, please?

1. Assume that the MPC is .7 and the formula for the fiscal multiplier is as follows: 1/(1-MPC)

Show your work for each part of the equation:

By how much will AD at current prices shift/increase with

A.) A $185 billion increase in government purchase
B.) A $185 billion tax cut

What will the cumulative or total AD shift/increase be(after the multiplier effect) for:

C.) Part A Above
D.) Part B Above.

Assume the Economy has a recessionary GDP gap of 615 billion and an upward sloping AS curve. Will the cumulative impact oft he increase in government spending in part (C) be enough to close the GDP gap? Explain.
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