Question

Suppose that a certain country has an MPC of 0.9 and an equilibrium real GDP of $500 billion. If government decreases taxes by $4 billion, what will be its new equilibrium real GDP? Instructions: Enter your answer as a whole number. New Equilibrium Real GDP =$ billion.

Answer 1

The new equilibrium real GDP is $495.556 billion.

Step-by-step explanation:

Given an MPC of 0.9 and an equilibrium real GDP of $500 billion, we can calculate the change in equilibrium real GDP resulting from a decrease in taxes. The change in equilibrium real GDP is equal to the change in government spending multiplied by the spending multiplier. In this case, the change in taxes is -$4 billion and the spending multiplier is equal to 1/MPC = 1/0.9 = 1.1111. Therefore, the change in equilibrium real GDP is equal to -$4 billion * 1.1111 = -$4.4444 billion. To find the new equilibrium real GDP, we subtract the change in equilibrium real GDP from the initial equilibrium real GDP of $500 billion. The new equilibrium real GDP is $500 billion - $4.4444 billion = $495.556 billion.

Answer 2

After a $4 billion tax decrease and with an MPC of 0.9, the new equilibrium real GDP for the country increases by $40 billion to a total of $540 billion.

Step-by-step explanation:

To determine the new equilibrium real GDP after a decrease in taxes by $4 billion in a country with a marginal propensity to consume (MPC) of 0.9, we employ the concept of the expenditure multiplier. The expenditure multiplier is calculated as 1 divided by (1-MPC). Since the MPC is 0.9, the expenditure multiplier is 1 / (1 - 0.9) = 10.

With a tax decrease of $4 billion, the increase in total spending will be the tax reduction multiplied by the expenditure multiplier, which equals $4 billion * 10 = $40 billion. The new equilibrium real GDP will be the initial real GDP plus the increase in total spending. Therefore, the new equilibrium real GDP is $500 billion + $40 billion = $540 billion.