# November 2023 Complete the following problems from the problem set 1 In the tax

Economics Module 5 Homework Assignment

Business Finance

Complete the following problems from the problem set

1. In the tax cut example on pages 236–37,

( a ) By how much does consumer saving increase initially?

( b ) How large is the initial spending injection?

2. Suppose the consumption function is

C 5 $400 billion 1 0.8Y

and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before multiplier effects) with

( a ) A $50 billion increase in government purchases?

( b ) A $50 billion tax cut?

( c ) A $50 billion increase in income transfers?

What will the cumulative AD shift be for

( d ) The increased G?

( e ) The tax cut?

( f ) The increased transfers?

3. Suppose the government decides to increase taxes by $20 billion to increase Social Security benefits by the same amount. How will this combined tax transfer policy a f fect aggregate demand at current prices?

5. If the AD shortfall is $600 billion and the MPC is 0.9,

( a ) How large is the desired fiscal stimulus?

( b ) How large an income tax cut is needed?

( c ) Alternatively, how much more government spending would achieve the target?

6. If the AD excess is $300 billion and the MPC is 0.8,

( a ) How much fiscal restraint is desired?

( b ) By how much do income taxes have to be increased to get that restraint?

7. ( a ) According to the News on page 238, how much more did the average household spend on

appliances, electronics, and furniture when it received the 2008 tax r e bate?

(b) If all 110 million households did so, how much did aggregate consumption i n crease?

( c ) If the MPC was 0.75, how much would cumulative spending increase as a result?