Macroeconomics question!!!??? help please!!!?

Question

Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish the same goal.

Any help would be appreciated!!! I'm so confused. Thanks!!!

Answer 1

ΔY/ΔG=1/(1-0.8)=1/0.2=5

ΔY=+25

ΔG=+25/5=$+5 billion.

ΔY/ΔT= -0.8/(1-0.8)= -0.8/0.2= -4

ΔY=+25

ΔT=25 / -4 = $ - 6.25 billion

Why the difference? - difference is because tax multiplier always is less than government expenditures multiplier.

ΔY/ΔG=5

ΔY=5ΔG

ΔY/ΔT= -4

ΔY= -4ΔT

5ΔG= -4ΔT

ΔT= -5ΔG/4 = -1.25ΔG

If ΔG=2 then ΔT= -1.25*2= -2.5 and so on..

If ΔG=3 then ΔT= -3.75

If ΔG=4 then ΔT= -5.00

If ΔG=5 then ΔT= -6.25