Your are given the following data for national economy of a

Your are given the following data for national economy of a country Y: Equilibrium GDP is $6000 million. MPC is 0.8. lt is considered necessary to increase GDP by 5 %. Find: What amount of additional government spending (without changing taxes) would be needed to reach the desired increase of GDP? What change in total amount of direct taxes (without changing government spending) would be necessary to reach the same increase o GPD? Illustrate each of the solutions on separate graph!

Solution

a) MPC= change in consumption/change in income

As desired increase in GDP is 5%

Present GDp= $6000 mn
Desired GDp= 1.05*6000mn =$6300 mn

As MPC is 0.8 then 20% of the amount is saved by consumers so government has to spend 20% of 6300 to reach desired increase in GDP and it is $1260 mn

b)Same as above