Assume that taxes depend on income. The MPC is 0.8 and t is 0.4. If government purchases increase by $100 billion, the equilibrium level of output will increase by

Question

Quizplus · Accepted Answer

The multiplier formula is 1/(1 - MPC(1 - t)). Substituting the given values, we get 1/(1 - 0.8(1 - 0.4)) = 1/(1 - 0.8*0.6) = 1/(1 - 0.48) = 1/0.52 = 1.9231. Therefore, an increase in government purchases of $100 billion would increase the equilibrium level of output by $100 billion * 1.9231 = $192.31 billion.

Assume That Taxes Depend on Income