If government increases its tax revenues by $15 billion and the MPC is 2/3,then we can expect the equilibrium GDP to:
A) decrease by $30 billion.
B) decrease by $45 billion.
C) decrease by $35 billion.
D) decrease by $55 billion.

Question

Quizplus · Accepted Answer

The tax multiplier is calculated as -MPC/(1-MPC). With an MPC of 2/3, the tax multiplier is -2/3 / (1-2/3) = -2. The change in GDP is the tax multiplier times the change in taxes: -2 * $15 billion = -$30 billion.

If Government Increases Its Tax Revenues by $15 Billion and the MPC