Suppose the marginal propensity to consume is 0.8.If the government cut taxes by $100 billion,then real GDP would increase by $500 billion.

Question

Quizplus · Accepted Answer

Since the MPC is 0.8, every $1 of tax cut will increase consumption by $0.8. Therefore, $100 billion tax cut will increase consumption by $80 billion. Using the formula for calculating the expenditure multiplier, we get:
Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 5
Therefore, the increase in real GDP will be:
ΔY = Multiplier * ΔC = 5 * $80 billion = $400 billion
Since the given increase in real GDP is $500 billion, which is more than the calculated increase of $400 billion, the statement is true.

Suppose the Marginal Propensity to Consume Is 0