Econs Problem?

Question

A) A program of tax rebates, distributed uniformly across the population of those filing tax returns, amounting to $150 billion in total rebates.

B) A $150 billion increase in federal government spending on repairs to highways and bridges in states across the country..

Assume that both the rebates and the road repair monies are distributed between April and August, so there is no difference in the timing of these disbursements.

Answer 1

Simple Keynesian model of macro-economics shows that an increase in govt. spending of $150 billion will lead to an increase in equilibrium income by X=$150*[1/(1-mpc)] where mpc is marginal propensity to consume and <1. A $150 billion fall in net tax collections due to rebates will increase equilibrium income by Y= $150 billion *[ mpc/(1-mpc)].

Since mpc is < 1, value of Y will be less than the value of X.

Thus, the effect of govt. spending will be larger than equivalent amount of tax rebates paid out by the Govt.

Answer 2

A)

Keynesian simple tax multiplier=ΔY/ΔT= -MPC/(1-MPC)

there MPC - marginal propensity to consume

MPS+MPC=1

MPS - marginal propensity to save

MPS=1-MPC

ΔT= -150

ΔY= 150MPC/MPS

B)

Keynesian simple government spending  multiplier=ΔY/ΔG= 1/(1-MPC)

ΔG= +150

ΔY= 150/MPS

A: ΔY= 150MPC/MPS

B: ΔY= 150/MPS

Since MPS <1 and MPC<1 so just compare upper parts of residuals

A<B

150MPC < 150

Conclusion - in simple keynesian model 'A' case (tax) will have less effect on economy while 'B' will cover GDP gap better. So 'B' case is better solution for your question.

P.S. Though you should take into account other side-effects and model limitations.