If the MPC is 0.6,and the government cuts taxes by $50b,the overall effect on GDP will be:

Question

Quizplus · Accepted Answer

In this case, we can use the formula for the government spending multiplier:

Multiplier = 1 / (1 - MPC)

Multiplier = 1 / (1 - 0.6) = 2.5

The $50 billion tax cut will then lead to an increase in GDP of:

ΔGDP = Multiplier x ΔT

ΔGDP = 2.5 x (-$50b) = -$125b

But we need to remember that this is the change in GDP if there were no other offsetting factors. In reality, there may be other economic forces at play that could partially counteract the effect of the tax cut. However, based solely on the given information and the multiplier formula, the answer is an increase of $75 billion.

If the MPC Is 0