Economics_chap_8_11

1. In the tax-cut example on pages 231–233, (a) By how much does consumer saving increase initially? (b) How large is the initial spending injection? 

2. Suppose the consumption function is C=  $500 billion + 0.9Y 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 $30 billion in order to increase Social Security benefits by the same amount. How will this combined tax-transfer policy affect aggregate demand at current prices?

5. If the AD shortfall is $800 billion and the MPC is 0.8, (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?

(a) According to the News on page 233, how much more did the average household spend on appliances, electronics, and furniture when it received the 2008 tax rebate? (b) If the MPC was 0.9, how much would cumulative spending increase as a result?