A tax cut of $8 billion with an MPC of 0.90 will cause a cumulative change in spending equal to:
A) An increase of $720 million.
B) An increase of $72 billion.
C) An increase of $80 billion.
D) A decrease of $720 billion.

Question

Quizplus · Accepted Answer

The cumulative change in spending due to a tax cut can be calculated using the multiplier effect formula: Multiplier = 1 / (1 - MPC). With an MPC of 0.90, the multiplier is 1 / (1 - 0.90) = 10. Therefore, a tax cut of $8 billion will lead to a cumulative increase in spending of $8 billion * 10 = $80 billion.

A Tax Cut of $8 Billion with an MPC of 0.90