Unit 3.3 Chapter 12 Questions: 2+3 Date May 8 (maybe...)

2.
The Government Spending Multiplier:

MPC / MPS = 1 / 0.2 = 5

200 billion dollars is wanted, therefore:

200 billion / 5 = 40 billion dollars must be spend

Or the government could decrease taxes:

40 billion / MPC = Amount to be decreased by

40 billion / .8 = 50 billion

3. The governmental fiscal policy for ending severe demand-pull inflation is to use a contractionary policy, through decreasing government spending or increasing taxes upon the public.Increasing taxes will reduce the Disposible income, which will decrease the consumption and the investment,therefore, in addition to the decreased government spending, all of these measures will shift the aggregate demand curve inwards and thereby slow down demand because they are all determinants of demand and when they decrease, then so does the aggregate demand, which in turn reduces or stops demand-pull inflation. If someone wished to preserve the size of the government then they would favour the decreasing government fiscal policy, but if they wished to decrease the public sector, then they would increase taxes.