If the MPC is 0.9,and the government cuts taxes by $400b,the overall effect on GDP will be:

Question

Quizplus · Accepted Answer

MPC (marginal propensity to consume) = 0.9 means that for every additional dollar of income, individuals will spend 90 cents and save 10 cents. When the government cuts taxes by $400 billion, individuals will have an extra $400 billion in disposable income. 
Using the formula for the spending multiplier (1/1-MPC), we get: 
1/1-0.9 = 10 
This means that the initial $400 billion tax cut will lead to an increase in overall spending by $4 trillion (10 times the initial tax cut). 
Therefore, the overall effect on GDP will be an increase of $3,600 billion ($4 trillion minus the initial tax cut of $400 billion).

If the MPC Is 0