If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should increase taxes by more than $40 billion.

Question

Quizplus · Accepted Answer

The tax multiplier is smaller than the spending multiplier. With an MPC of 0.6, the tax multiplier is -0.6/(1-0.6) = -1.5. To decrease GDP by $100 billion, taxes need to be increased by more than $100 billion / 1.5 = $66.67 billion, which is more than $40 billion.

If Policy Makers Want to Decrease Real GDP by $100