Question

Suppose that the government spending multiplier is 3.2 and the tax multiplier is 2.9. This means that, if prices are constant, a $200 billion rise in government spending will __________________, and a $200 billion cut in taxes will _____________________.

Answer 1

At constant prices, a $200 billion rise in government spending will increase Real GDP by 640 billion

and;

A $200 billion cut in taxes will increase real GDP by 580 billion

Step-by-step explanation:

Government spending multiplier = 3.2

Tax multiplier = 2.9

Mathematically;

ΔY/ΔG = 3.2

ΔY/200 = 3.2

ΔY = 200 * 3.2

ΔY = 640 billion

Cut in taxes;

Tax multiplier = 2.9

ΔY/ΔT = 2.9

ΔY/200 = 2.9

ΔY = 2.9 * 200

ΔY = 580 billion