A tax multiplier equal to − 4.30 would imply that a $100 tax increase would lead to a:

Question

Quizplus · Accepted Answer

The tax multiplier formula is given by:

Tax multiplier = - ( MPC / (1 - MPC) )

Where MPC is the marginal propensity to consume.

Assuming an MPC of 0.7 (typical value), the tax multiplier would be:

Tax multiplier = - (0.7 / 0.3) = - 2.33

This implies that a $100 tax increase would lead to a $233 decline in real GDP.

Therefore, if the tax multiplier is -4.30, the decline in real GDP would be even greater:

Decline in real GDP = Tax multiplier * Tax increase

Decline in real GDP = -4.30 * $100 = -$430

So, choice A is correct.

A Tax Multiplier Equal to − 4