If the tax multiplier is -1.5 and a $20 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.)

Question

Quizplus · Accepted Answer

The tax multiplier effect indicates how a change in taxes affects the GDP. A tax multiplier of -1.5 means that for every dollar increase in taxes, GDP decreases by $1.50. Therefore, a $20 billion tax increase would lead to a $30 billion decrease in GDP ($20 billion * 1.5 = $30 billion).

If the Tax Multiplier Is -1