-Refer to the above table.If an additional lump-sum tax of $20 were imposed,we would expect:
A) equilibrium GDP to fall by $30.
B) equilibrium GDP to fall by $20.
C) equilibrium GDP to fall by $50.
D) equilibrium GDP to rise by $24.

Question

-Refer to the above table.If an additional lump-sum tax of $20 were imposed,we would expect:
A) equilibrium GDP to fall by $30. 
B) equilibrium GDP to fall by $20. 
C) equilibrium GDP to fall by $50. 
D) equilibrium GDP to rise by $24.

Quizplus · Accepted Answer

A lump-sum tax reduces disposable income, which reduces consumption and thus aggregate demand. The fall in aggregate demand will lead to a fall in equilibrium GDP. The multiplier effect of the tax is 1.5, so the fall in equilibrium GDP will be 1.5 times the amount of the tax, or $30.

-Refer to the Above Table