Second Evaluation Summer 2018 I According to the Venezuelan

Second Evaluation Summer 2018 I. According to the Venezuelan National Institute of Statistics, the Basket of Goods & Services a nd Gross Domestic Product (GDP) for the period 2009-2016 are as shown on Table 1. Table 1 Basket of Year Goods &GDP; (Current $) 2009 2010 2011 2012 2013 2014 2015 2016 Services 13,500 17,650 22,125 28,125 35,840 43,120 67,250 113,260 494,591,535 677,593,637 707,262,549 1,016,834,748 1,357,487,061 1,635,451,060 2,245,843,966 3,031,242,431 Given that: (a) the Base Year is 2009; (b) The Marginal Propensity to Consume (MPC) is 80%; and (c) The Reserve Requirement is 25%. You are to implement a Fiscal or Monetary Policy (Your Choice) that allows to close 2017 exacty at the same level of 2015. What type of policy and magnitude should be implemented?

Solution

It is given that GDP in 2016 is $ 3031,242,431

A policy allows 2017 GDP to close at the same level of 2015. That is 2017 GDP is $2245,843,966

A monetary policy can be applied but here money supply is not given, so, we can\'t determine the magnitude of monetary policy that will achieve 2017 GDP.

A fiscal policy can also be applied to get the same desired result. Here MPC = 80? = 0.8

Therefore, multiplier = 1/(1 - MPC) = 1/0.2 = 5

Change in GDP = multiplier * change in government spending

Or, (2,245,843,966 - 3031,242,431) = 5 * ?G

Or, ?G = - 785,398,465 / 5 = - 157,079,693

Therefore, a contractionary fiscal policy or, reduction in government spending by $ 157,079,693 will allow to close 2017 GDP exactly at the same level of 2015.