If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes,it could __________ autonomous net taxes by __________.
A)increase; $100 billion
B)decrease; $100 billion
C)decrease; $100 billion $\times$ MPC/(1 - MPC)
D)increase; $100 billion $\times$ MPC/(1 - MPC)
E)decrease; $100 billion $\times$ (1 - MPC)/MPC

Question

Quizplus · Accepted Answer

When the government wants to increase equilibrium by $100 billion, it needs to decrease autonomous net taxes by $100 billion. This is because a decrease in net taxes increases disposable income, which leads to an increase in consumption spending and aggregate demand, ultimately increasing equilibrium output. This can be shown using the formula for the government spending multiplier: 1/(1 - MPC), where MPC is the marginal propensity to consume. If the government wants to increase equilibrium by $100 billion, then we need to solve for the change in autonomous net taxes by multiplying the desired change in output by the spending multiplier: $100 billion = F1F1F1S1F1F1F1-100 billion(MPC/(1 - MPC)). Solving for the change in autonomous net taxes gives a decrease of $100 billion, as in choice (C).

If the Government Wants to Increase Equilibrium by $100 Billion ×\times×

If the Government Wants to Increase Equilibrium by $100 Billion $\times$