If lump-sum taxes are decreased by $10 billion and the equilibrium GDP increases by $40 billion as a result, we can conclude that:
A)the expenditures multiplier is 4.
B)the MPC for this economy is .8.
C)the MPC for this economy is .6.
D)the expenditures multiplier is 3.

Question

Quizplus · Accepted Answer

The change in GDP is $40 billion, and the change in taxes is $10 billion. The tax multiplier is the change in GDP divided by the change in taxes, which is 4. The tax multiplier is also equal to the marginal propensity to consume (MPC) divided by (1 - MPC). Solving the equation 4 = MPC / (1 - MPC) gives MPC = 0.8.

If Lump-Sum Taxes Are Decreased by $10 Billion and the Equilibrium