The MPC is .8. Real GDP is $600 billion. The natural rate of real GDP is $800 billion. Policymakers choose to follow the aggregate expenditures model to design a tax policy to move the economy to full employment. Taxes should be:
A) decreased by $40 billion.
B) decreased by $50 billion.
C) increased by $40 billion.
D) increased by $50 billion.

Question

Quizplus · Accepted Answer

To close the $200 billion GDP gap, the tax multiplier, which is -MPC/(1-MPC), is used. With MPC of 0.8, the tax multiplier is -4. Reducing taxes by $50 billion will increase GDP by $200 billion (50 x 4).

The MPC Is