If the MPC is equal to .75 and net taxes, government spending, investment and net exports are all autonomous, then a $1 billion dollar decrease in net taxes will
A)have no effect on real GDP
B)increase real GDP by $1 billion
C)increase real GDP by $2 billion
D)increase real GDP by $3 billion
E)increase real GDP by $4 billion

Question

Quizplus · Accepted Answer

The tax multiplier is calculated as -MPC/(1-MPC). With an MPC of 0.75, the tax multiplier is -0.75/(1-0.75) = -3. Therefore, a $1 billion decrease in net taxes will increase real GDP by $3 billion.

If the MPC Is Equal to