Suppose the government reduces taxes by$20 billion, that there is no crowding out

Chapter 21, Problem 8

(choose chapter or problem)

Suppose the government reduces taxes by$20 billion, that there is no crowding out, andthat the marginal propensity to consume is .a. What is the initial effect of the tax reductionon aggregate demand?b. What additional effects follow this initialeffect? What is the total effect of the tax cuton aggregate demand?c. How does the total effect of this $20 billiontax cut compare to the total effect of a $20billion increase in government purchases?Why?d. Based on your answer to part (c), can youthink of a way in which the governmentcan increase aggregate demand withoutchanging the governments budgetdeficit?

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