<p>If an economy was operating at an equilibrium level of output at $3,000 billion and full employment equilibrium was $4,000 billion, with a marginal propensity to save of .2, a Keynesian economist would recommend:</p>
<p>A. Increase government spending by $1,000 billion
B. Increase government spending by $500 billion
C. Increase government spending by $250 billion
D. Decrease taxes by $1,000 billion
E. Decrease taxes by $250 billion</p>
<p>Answer is E by the way.</p>
<p>Tax multiplier = MPC/MPS = .8/.2 = 4
Govt Spending Multiplier = 1/MPS = 5
Since you want 3000 ---> 4000, you need add $1000 to output.
Tax: 1000/4 = $250
Govt spending: 1000/5 = $200
Only answer choice E matches</p>
<p>When people get the $250 billion in tax reductions, they will spend 80% and save 20& of it. $250B(.8) = $200B.</p>
<p>The recipients of the $200 billion will spend 80% of it =$160 billion = $250B(.8)(.8)</p>
<p>And so on, indefinitely.</p>
<p>Then spending will amount to an infinite series,</p>
<p>$250B ( .8 +(.8)(.8) + (.8)(.8)(.8) + ...).</p>
<p>It turns out that the infinite series adds up to:</p>
<p>$250B ( .8 / (1 - .8)) = $250B((.8/.2)) = $250B (4) = $1000B.</p>
<p>Look at spending multiplier in your textbook.</p>
<p>Another one, I can't find the employment/umemployment formulas in my prep book.</p>
<p>FIGURE 5</p>
<p>Population 50 million
Number in the labor force 30 million
Number employed full time 20 million
Number unemployed 2 million</p>
<ol>
<li><p>Based on the data in Figure 5, what is the labor force participation rate of the economy?
A. 40 percent
B. 56 percent
C. 60 percent
D. 66.7 percent
E. 93.3 percent</p></li>
<li><p>Based on the data in Figure 5, what is the unemployment rate of the economy?
A. 4 percent
B. 6.7 percent
C. 7.1 percent
D. 10.0 percent
E. 60 percent</p></li>
</ol>
<p>bump bump bump!!</p>
<p>Labor force participation rate = number of people in an economy looking for a job/has a job divided by the population of working age.</p>
<p>22/30 = 73 percent... Are you sure 50 million stands for the general population, as opposed to the population in the working age (between 16-64)?</p>
<p>If it's the population in the working age it would be simply 30/50 = 60 percent.</p>
<p>Unemployment rate = 2/30 = 0.066 or 6.7%</p>
<p>Thanks a bunch!! I suck at Macro..but love Micro.</p>
<p>LOL taking both tomorrow as well? Good luck!</p>