Question

If the AD shortfall is $100 billion and the MPC is 0.8, Instructions: Enter your responses rounded to one decimal place. a. How large is the desired fiscal stimulus? $ 20 billion b. How large an income tax cut is needed? $ billion c. Alternatively, how much more government spending would achieve the target? $ billion

Answer 1

Multipier is 1/(1-.8) = 5

a. AD Shortfall/Multiplier = 100/5 = 20 billion

b. FS/MPC = 20/ .8 = 25 billion

c. 20 billion