If the absolute value of the tax multiplier equals 1.5, real GDP is $13 trillion, and potential GDP is $13.6 trillion, then taxes would need to be cut by ________ to restore the economy to potential GDP.
A)$400 billion
B)$450 billion
C)$600 billion
D)None of these options is correct. Taxes should be increased in this case.

Question

Quizplus · Accepted Answer

To close the GDP gap of $0.6 trillion ($13.6 trillion - $13 trillion), taxes need to be cut by $0.4 trillion ($400 billion) because the tax multiplier is 1.5, meaning a $1 change in taxes changes GDP by $1.5.

If the Absolute Value of the Tax Multiplier Equals 1