Answer
a) 15 billion dollars
b) 60 billion dollars
c) The government purchases of 20 billion dollars increase the aggregate demand by 20 billion dollars. With the multiplier of 4 (1 divided by (1-MPC)), the total bump by the government purchases is 80 billion dollars. However, with the tax cut, consumers are going to save some of that tax cut. (That's why the government purchases are more effective than the tax cut.)
d) A government can increase demand while not changing the deficit by increasing their purchases and increasing taxes by the same amount of the purchases.
Work Step by Step
a)
MPC + MPS = 1
(every dollar is either consumed or saved)
MPC = 3/4
$20 *3/4 =60/4 = 15$
b)
$1/(1-MPC)*15$
$1/(1-.75)*15$
$1/.25*15$
$4*15$
$60$
