If the MPC = 0.75,a decrease in personal taxes from $100 billion to $80 billion will increase real GDP by
A) $20 billion.
B) $40 billion.
C) $60 billion.
D) $80 billion.

Question

Quizplus · Accepted Answer

The change in taxes is $20 billion. With an MPC of 0.75, the initial increase in consumption is $15 billion ($20 billion * 0.75). The multiplier is 1/(1-MPC) = 4. Therefore, the total increase in GDP is $15 billion * 4 = $60 billion.