PRINCIPLES OF MACROECONOMICS MULTIPLIER PROJECT V3
Bayou Sans Espoir, LA, has been experiencing a mini-recession because of the significant decline in crude oil prices and cuts in state subsidies to its crawfish packing plant. As a result of falling oil prices, the oil companies operating in Bayou Sans Espoir have reduced investment spending in the area by $8 mil; Cajun Crawfish, the largest crawfish packing operation, has reduced local investment by $500,000.
a. If the local marginal propensity to consume is 0.75, by how much has decreased investment spending reduced local gross domestic product and income?
b. The State of Louisiana has announced that it will cut 800 families in Bayou San Espoir from the state welfare rolls as part of its overall cuts to its cash assistance program. It is estimated that the total annual reduction in transfer payments to Bayou Sans Espoir residents will amount to $3 mil. By how much will local GDP be reduced by this reduction in transfer payments?
c. Bayou Sans Espoir is experiencing hard times. The local unemployment rate has risen to 5% points above the full employment level after the cuts to investment spending and transfer payments to residents. If local GDP was $506 mil before those changes, by how much, in dollar figures, would local GDP now have to increase to reach the full employment level?
d. The Chinese have discovered crawfish (miniature lobster on menus in China) and have placed new orders with Cajun Crawfish amounting to $6 mil annually. By how much will local GDP increase as a result of the increase in crawfish sales?
e. Unfortunately for Bayou Sans Espoir, the State if Louisiana has cut off all funding to Planned Parenthood Clinics throughout the state of Louisiana. The local clinic, which received $3 mil annually from the state, will close. At the same time, a tax cut pushed through earlier in the year by the former governor, who was running for the Republican presidential nomination, will reduce taxes paid by local residents by $2 mil. How will these changes affect local GDP?