Final answer:
To increase GDP by $360, we should decrease taxes by approximately $244.95.
Step-by-step explanation:
To increase GDP by $360, we need to decrease taxes by a certain amount. The formula to calculate the effect of a change in taxes on GDP is the multiplier formula. The multiplier is the ratio of the change in GDP to the change in autonomous spending. In this case, the change in GDP is $360 and we need to find the change in taxes that will result in this GDP increase.
Let's assume the tax rate is 0.4 of national income and the marginal propensity to consume (MPC) out of after-tax income is 0.8. Using the formula:
Multiplier = 1 / (1 - (tax rate * MPC))
Substituting the values:
Multiplier = 1 / (1 - (0.4 * 0.8)) = 1 / (1 - 0.32) = 1 / 0.68 = 1.471
To find the change in taxes, we multiply the desired change in GDP by the multiplier:
Change in taxes = Change in GDP / Multiplier = $360 / 1.471 = $244.95
Therefore, to increase GDP by $360, we should decrease taxes by approximately $244.95.