All Multipliers (Fiscal Policy) FRQ's
Multiplier Cheat Sheet here
2019 AP Macroeconomics Exam
(A.) Draw a AD/AS curve showing Recession
(C.) The MPC = .8. The equilibrium (current) output is $500b and the Full-Employment output is $540b.
(i) Calculate the minimum change and the direction of change in taxes required to get the AD to close the output gap.
If the MPC = .8
the MPS = .2
GS multiplier is 1/MPS or 1/1-MPC
1/.2 = 5 is the GS Multiplier
to get 40b of GDP then GS needs to increase by 8b (40b/5 = 8b)
(ii) Calculate the minimum change and the direction of change in the required to get the AD to close the output gap.
The Taxing Multiplier formula is MPC/MPS if taxes are decreasing (expansionary)
the Taxing multiplier if taxes are decreasing is -MPC/MPS
the quick understanding is that the Taxing Multiplier is
always 1 Less than the GS Multiplier
I'll say that again
**The Taxing Multiplier is always 1Less than the Gs Multiplier**
If the GS multiplier is 5 then the Taxing Multiplier is 4
IF taxes are reduces the amount of reduction in taxes needs to be greater to 10b.
40b/4 = 10b of reduced taxes
Why is the taxing multiplier less???
If the GS increases all of that money immediately flows out into the economy
increasing consumption and shifting AD right.
If citizens get a tax cut then some of it will be saved. Not all of the tax savings is spent so
taxes have to be cut by a greater amount than GS to ensure the AD increase.
1. Operating below full employment = Recession
(A.) Draw a CLG of the AD/AS curve showing a recession.
(D.) Assume using fiscal policy the MPC is .8 and the value of the recessionary gap is 300b.
(i) If the government changes its spending without changing taxes calculate the minimum needed to close the output gap.
We need 300b of an increase in GDP
the MPC is .8 therefore the MPS is .2
the GS multiplier is 1/MPS = 5
The GS needs to increase by 60b
as 60b X 5 = 300b of GDP increase
(ii) If the government decided to reduce taxes to close the output gap then,
The Taxing multiplier formula is MPC/MPS = 4
or
You should just know that the taxing multiplier is always 1 Less than the GS Multiplier
300b/4 = 75
The government would reduce taxes by 75b X 4 = 300b of GDP increase
75 > 60
2014 AP Macroeconomics Exam
1. The economy is below full employment = Recession
(C.) If the MPC is .75 and the government spends 100b what is the maximum change in GDP.
If the MPC = .75 then the MPS = .25
the GS multiplier = 1/MPS = 4
GS 100b x 4 = 400b of GDP increase
(F.) The government pays for the 100b of GS by increasing taxes by 100b,,,
what will happen to GDP.
If you use Expansionary (Fiscal) Policy GS increases by 100b = 400b increase GDP
at the same time
Contractionary (Fiscal) Policy with Taxes increasing by 100b = 300b decrease GDP
Why 300b (because the Taxing multiplier is 1 LESS than the GS multiplier (3)
((400b increase and 300b decrease still leaves an increase in GDP of 100b))
2008 AP Macroeconomics Exam
1. Drop in consumer confidence decreases C - consumption therefore the economy is now in a recession.
(C.) The economy is short 500b and the MPC = .08
(i) What is the minimum of GS to close the gap
If the MPC = .8 then the MPS = .2
the GS multiplier = 5 as 1/MPS = 5
If the government spends 100b x (5) = 500b GDP increase
(ii) Instead the Government wants to reduce taxes to close the gap. U.
The Taxing multiplier = MPC/MPS = 4
the government must reduce taxes by 125b to increase GDP by 500b
as 125 x 4 = 500b increase in GDP
2000 AP Macroeconomics Exam
(B.) Government spending has the greater multiplier so gets the biggest kick to GDP.
