Assume that taxes depend on income. The MPC is 0.8 and t is 0.25. The government spending multiplier is

Name: Assume that taxes depend on income. The MPC is 0.8 and t is 0.25. The government spending multiplier is
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Question

Quizplus · Accepted Answer

The government spending multiplier is calculated as:
Government spending multiplier = 1 / (1-MPC*(1-t))
= 1 / (1-0.8*(1-0.25))
= 1 / (1-0.8*0.75)
= 1 / (1-0.6)
= 1 / 0.4
= 2.5

Therefore, the best choice is B as it gives the correct calculation for the government spending multiplier.

Assume That Taxes Depend on Income