Suppose the GDP is in equilibrium at full employment and the MPC is .80. If government wants to increase its purchase of goods and services by $16 billion without changing equilibrium GDP, taxes should be:
A) Increased by $20 billion
B) Reduced by $16 billion
C) Increased by $16 billion
D) Reduced by $20 billion

Question

Quizplus · Accepted Answer

To offset the increase in government spending and keep GDP unchanged, taxes should be increased by the amount that will reduce consumption by the same amount. With an MPC of 0.80, a $20 billion tax increase will reduce consumption by $16 billion (0.80 * $20 billion), offsetting the $16 billion increase in government spending.

Suppose the GDP Is in Equilibrium at Full Employment and the MPC