If the MPC is 0.75,a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by
A)$75 billion
B)$100 billion
C)$300 billion
D)$400 billion
E)$500 billion

Question

Quizplus · Accepted Answer

The equation for the multiplier effect is:
Multiplier = 1 / (1 - MPC)
Multiplier = 1 / (1 - 0.75)
Multiplier = 4

Using the multiplier, we can calculate the increase in equilibrium GDP:
Increase in GDP = Multiplier * Decrease in net taxes
Increase in GDP = 4 * $100 billion
Increase in GDP = $400 billion

Therefore, the correct answer is (C) $300 billion.

If the MPC Is 0