91Ó°ÊÓ

Marginal Propensity to consume is the proportion of expansion in utilization because of progress in Income. Marginal Propensity to save is the proportion of expansion in saving because of progress in Income.

We know,

Marginal Propensity to save = $0.5$

Marginal Propensity of consume + Marginal Propensity of Save = $1$

Hence Marginal Propensity to consume = $1-0.5=0.5$

Given,

Real GDP at full employment = $\$18.55$trillion

Real GDP at present =$\$18.2$trillion

Change in real GDP$∆Y=$$18.55-18.2=0.35$

MPC =$0.5$

$\text{Invest multiplier}=\frac{\mathrm{Δ}Y}{\mathrm{Δ}I}$

$⇒\frac{\mathrm{Δ}Y}{\mathrm{Δ}I}=\frac{1}{1-MPC}$

role="math" localid="1651983785298" $$\begin{gathered} ∆I=350\text{billion}×0.5 \\ =175 \end{gathered}$$

new investment or government spending increases to$\$175$billion bring the economy up to full employment

We know,

change in real GDP = $∆Y$

$\text{Tax Multiplier}=\frac{\mathrm{Δ}Y}{\mathrm{Δ}T}$

role="math" localid="1651983919228" $⇒\frac{∆Y}{∆T}=\frac{-MPC}{MPS}$

$$\begin{gathered} \frac{0.35\text{trillion}}{\mathrm{Δ}T}=\frac{-0.5}{0.5}=-1 \\ ⇒∆T=175 \end{gathered}$$

The government must cut personal taxes by $\$175$billion to stimulate the economy to the full employment equilibrium.