Question

Assuming no change in government spending, an increase in taxes of $80 billion with an MPC of 0.50 will subtract a total of $___________ billion from the economy after the multiplier effect.a) 80

b) 400
c) 200
d) 500

Answer 1

A total of $50 billion will be subtracted from the economy after the multiplier effect

Step-by-step explanation:

Given:

MPC = 0.5

Taxes = $80 billion

First, we calculate the Multiplier

Multiplier = 1 ÷ (1 - MPC)

Multiplier = 1 ÷ (1 - 0.5)

Multiplier = 1 ÷ 0.5

Multiplier = 2

Since the initial tax is $80 billion and the multiplier is 2; this implies that

2 * $80billion

= $160 billion

Multiplier Effect = $160 billion - $80 billion

Multiplier Effect = $80 billion