Chapter 12 key question 2, 3

2: Multiplier = 1/(1-MPC)= 1/0.2= 5 - government spending = $5 billion
80% Tax Cut = 5 Billion, Tax Cut = 6.25 Billion
The difference between tax cut and gov spending is because not all of the tax cut is spend, some is saved.
Possible Combination - 5 billion tax cut and 1 billion increase in gov. spending

3: 1) reduce government spending 2) increase taxes
The person who wants to preserve the size of the government may go for option 2 because that will get gov more money while the person who thinks the public sector is too large might go for option 1 so as to "waste" some of gov's money.