The MPC is 2/3. Real GDP is $500 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 $150 billion.
B) decreased by $100 billion.
C) increased by $150 billion.
D) increased by $100 billion.

Question

Quizplus · Accepted Answer

The MPC is 2/3, so the multiplier is 1/(1-MPC) = 1/(1-2/3) = 3. Real GDP is $500 billion, and the natural rate of real GDP is $800 billion. To move the economy to full employment, policymakers need to increase aggregate expenditures by $800 billion - $500 billion = $300 billion. The multiplier is 3, so they need to decrease taxes by $300 billion / 3 = $150 billion.

The MPC Is 2/3