Given: Suppose in an effort to stimulate aggregate demand, the government mails tax rebate checks to all household, totaling $50 billion for the economy as a whole. Ignore crowding-out effect.
A) If the marginal propensity to consume (MPC) is 0.90, by how much would you expect these tax rebates to initially increase aggregate demand? Show your calculations step-by-step.
B) TRUE OR FALSE: Holding other things constant, a higher MPC is bound to yield a larger impact on the initial demand.
C) Including the multiplier effect, what is the total effect of these tax rebates on the aggregate demand. Show your calculations step-by-step
D) TRUE OR FALSE: Holding other things constant, a higher MPC is bound to yield a lower impact on the total demand.
E) How does the total effect of this policy compare to the total effect of a $50 billion increase in government spending? Show your calculations step-by-step