If the government wishes to decrease GDP by $2,100b,and the MPC is 0.6,it should:

Question

Quizplus · Accepted Answer

The government can decrease GDP by reducing aggregate demand. One way to reduce aggregate demand is by decreasing government spending or increasing taxes. Since the question asks to decrease GDP, taxes should be increased.

We can use the formula:

∆GDP = ∆Spending * (1/1-MPC)

Where MPC is the marginal propensity to consume.

To decrease GDP by $2,100b, we need to find the change in government spending (∆Spending) required.

-2,100 = ∆Spending * (1/1-0.6)

-2,100 = ∆Spending * 2.5

∆Spending = -840b

This means that the government needs to reduce spending by $840b. Since the government wants to increase taxes by $2,100b, we can use the formula:

∆Taxes = -∆Spending

∆Taxes = -(-840b)

∆Taxes = 840b

However, the question asks for the change in taxes, not the total amount. Therefore, the answer is to increase taxes by $1,400b (840b/0.6).

If the Government Wishes to Decrease GDP by $2,100b,and the MPC