Question

Suppose the government increases taxes by ​$110 billion and the marginal propensity to consume is 0.80. By how will equilibrium GDP​ change? The change in equilibrium GDP​ is: ​$ nothing billion. ​(Round your solution to one decimal place and include the minus sign if​ necessary.)

Answer 1

change in GDP= $440 billion

Step-by-step explanation:

Given :

Increase in the taxes by government = $110 billion

marginal propensity to the consumer (MPC)= 0.80

By formula we know that

Tax multiplier = -MPC/(1-MPC)

now putting the value we get

Tax multiplier = -
`(0.8)/(1-0.8)`

= -4

The change in GDP is given by( Tax multiplier* Increase in the taxes )

Therefore,change in GDP=
`-4*110= -440` billion

Minus sign indicate decrease in GDP