Suppose that the federal government allocates $5 billion to an "energy-efficient appliance rebate" program.It also raises taxes by $5 billion to keep the deficit from growing.If the marginal propensity to consume is 0.8, what is the effect on equilibrium GDP?

Question

Quizplus · Accepted Answer

The energy-efficient appliance rebate program increases aggregate demand by $5 billion. Given a marginal propensity to consume of 0.8, $4 billion of this spending will be spent on domestic output, and $1 billion will be saved or spent on imports.
The $5 billion tax increase reduces aggregate demand by $5 billion. Given a marginal propensity to consume of 0.8, $4 billion of this decrease in spending will come from lower consumption, and $1 billion will come from lower investment or government spending.
Thus, the net effect on equilibrium GDP is the increase in spending from the rebate program, minus the decrease in spending from the tax increase, or $5 billion - $4 billion = $1 billion. The increase in equilibrium GDP is therefore $1 billion because of the energy-efficient appliance rebate program.

Suppose That the Federal Government Allocates $5 Billion to an "Energy-Efficient