Assume an economy which has a MPC of 80% and is currently enjoying a perfectly balanced federal budget. Politicians, however, have determined that the best way to assure their re-election is to pass a tax cut which would return $50,000 to the taxpayers. In order not to disturb the balanced budget, the legislators simultaneously authorize spending cuts equal to the amount of the tax cut.

By how much will spending need to be cut?  $__________________

 What will be the impact of these events (combined spending/tax cuts) on overall output levels

increase                                      b)        decrease                                           c)         no change 

By how much will output levels change (if indeed they do)?  $_____________ What impact will the spending/tax cuts have on unemployment? 

increase it                                   b)        decrease it                                        c)         leave it unaffected

Mary Contrary was a computer programmer in Dallas, earning $80,000 a year in 2007 at a start-up dot.com. That year, she spent on consumption goods $72,000 and saved $8,000.  Mary's MPC is 80%.

What was her Average Propensity to Consume in 2007? _90___%

If at the beginning of 2008 as a part of her company's frantic efforts to survive she got laid off, her consumption spending would fall by $__________.

Consequently, in 2008 she would probably have spent not much more than $________ on consumption goods.