If the MPC is 0.6,and the government increases taxes by $300b,the overall effect on GDP will be:

Question

Quizplus · Accepted Answer

The MPC represents the fraction of additional income that is spent on consumption. In this case, an MPC of 0.6 means that for every additional dollar of income, individuals will spend 60 cents and save 40 cents.

If the government increases taxes by $300b, then individuals will have less disposable income to spend on consumption. Assuming no change in investment, this decrease in consumption will lead to a decrease in GDP.

Using the multiplier formula, we can calculate the overall effect on GDP as:

Change in GDP = - MPC / (1 - MPC ) × Change in taxes

= -0.6 / (1 - 0.6) × $300b

= -1.5 × $300b

= -$450b

Therefore, the correct answer is C) a decrease of $450b.

If the MPC Is 0