If MPC = 0.5, a simultaneous increase in both taxes and government spending of $20 will
A)decrease GDP by $20.
B)decrease GDP by $40.
C)increase GDP by $20.
D)increase GDP by $40.

Question

Quizplus · Accepted Answer

When both taxes and government spending increase by the same amount, the net effect on GDP is determined by the multiplier effect. With an MPC of 0.5, the spending multiplier is 2. The balanced budget multiplier, which is always 1, means that GDP will increase by the amount of the increase in government spending, which is $20.