Assume that the MPC is 0.9. If government purchases increase by $100, equilibrium output ________; and if taxes increase by $100, equilibrium output ________.

Question

Quizplus · Accepted Answer

The multiplier is 1/(1-MPC) = 1/(1-0.9) = 10. A $100 increase in government purchases directly increases aggregate demand by $100, leading to a $1,000 increase in equilibrium output due to the multiplier effect. A $100 tax increase reduces consumers' disposable income, leading to a decrease in consumption by $90 (MPC * tax increase). The decrease in consumption is then multiplied throughout the economy, leading to a $900 decrease in equilibrium output.

Assume That the MPC Is 0