Suppose the president is successful in passing a $10 billion tax increase.Assume that taxes are fixed,the economy is closed,and the marginal propensity to consume is 0.8.What happens to equilibrium GDP?
A)There is a $50 billion increase in equilibrium GDP.
B)There is a $50 billion decrease in equilibrium GDP.
C)There is a $40 billion increase in equilibrium GDP.
D)There is a $40 billion decrease in equilibrium GDP.

Question

Quizplus · Accepted Answer

The tax multiplier is calculated as -MPC/(1-MPC). With an MPC of 0.8, the tax multiplier is -4. A $10 billion tax increase leads to a $40 billion decrease in equilibrium GDP.

Suppose the President Is Successful in Passing a $10 Billion