If autonomous net taxes decline by $40 billion and the MPC = 0.75,then equilibrium real GDP demanded
A)declines by $120 billion
B)increases by $120 billion
C)declines by $160 billion
D)increases by $160 billion
E)increases by $40 billion

Question

Quizplus · Accepted Answer

The change in autonomous net taxes of $40 billion will have a multiplier effect on equilibrium real GDP. Given an MPC of 0.75, we can use the formula for the multiplier:
Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 4
Therefore, the change in autonomous net taxes of $40 billion will lead to a change in equilibrium real GDP of:
Change in equilibrium real GDP = Multiplier x Change in autonomous net taxes
Change in equilibrium real GDP = 4 x $40 billion = $160 billion
Since the change in autonomous net taxes is a decline, we need to subtract $160 billion from the initial equilibrium real GDP to find the new equilibrium real GDP demanded:
New equilibrium real GDP demanded = Initial equilibrium real GDP - Change in equilibrium real GDP
New equilibrium real GDP demanded = Initial equilibrium real GDP - $160 billion
New equilibrium real GDP demanded = Initial equilibrium real GDP - ($40 billion x 4)
New equilibrium real GDP demanded = Initial equilibrium real GDP - $160 billion
Therefore, the new equilibrium real GDP demanded is $120 billion higher than the initial equilibrium real GDP.

If Autonomous Net Taxes Decline by $40 Billion and the MPC