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Which program has the least damaging effect on gdp

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Reference no: EM13231236

Consider the following model of a closed economy (Smallville):

MPC = 0.8 - 0.01Y (marginal propensity to consume)
C = MPC x YD (consumption function)
YD = (Y - T) (disposable income)
I = 500 (investment spending)
G = 1,500 (government spending)
Y = AD (equilibrium condition)
T = 1,200 (taxes - non-income)


You can see that Smallville is running a budget deficit. Two policy programs are proposed: (1) eliminate the deficit by cutting government spending and (2) eliminate the deficit but raising taxes. Which program has the least damaging effect on GDP?

Reference no: EM13231236

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