Reference no: EM132415168

Wretched Mess, AK, has been experiencing a mini-economic boom fueled by the rediscovery of gold in the nearby Klondike River basin and the rumor that Sarah Palin will make several guest appearances in the "New Alaska Gold Rush" reality TV series filmed there. As a result of the influx of prospective gold miners and celebrity gawkers, local businesses and some national chains have increased investment spending by $6 mil, building everything from motels to big box stores.

• If the local marginal propensity to consume is 0.75, by how much has increased investment spending raised local gross domestic product and income?
• Wretched Mess is truly wretched, however, and the local unemployment rate remains above the full employment level by 5 percentage points, even after the influx if new investment. If local GDP was $516 mil before the injection of new investment spending, by how much, in dollar figures, would local GDP still have to increase to reach the full employment level? (Round up the next million to make all calculations easier.)
• The city government is proposing an aggressive spending program to increase employment and raise local GDP to the full employment level. How much additional government spending would be required to accomplish that goal?
• Ms. Palin has, in fact, appeared in Wretched Mess, and has strongly advocated for a local tax cut instead of increased government spending to raise local GDP to the full employment level, in contrast to her own record as mayor of Wasilla, which included construction of a multi-sport indoor sports complex, and the public utilities and roads to service it, financed by a sales tax increase and a $14.7 mil bond issue. By how much would local taxes have to be cut in order to close the GDP gap and achieve full employment? Is this tax cut greater than, less than, or equal to the additional government spending required in (c) above? Why?
• One benefit of local construction and opening of grocery/big box retailers and expansion of local businesses is that residents of Wretched Mess no longer need to cross the Canadian border to shop in Little Gold Creek and Dawson City. It is estimated that the opening of big box retailers in Wretched Mess will reduce spending by local residents across the border in Canada by $3.5 mil annually, and increase cross-border spending by Canadian residents by approximately $1.5 mil annually. By how much will Wretched Mess's local GDP increase as a result of these changes in shopping habits?