A $10 billion reduction in taxes increases Real GDP by $90 billion. Assuming a constant price level,what does the tax multiplier equal?

Question

Quizplus · Accepted Answer

The tax multiplier is calculated as: ΔY/ΔT = (1/1-MPC). Given that a $10 billion decrease in taxes led to a $90 billion increase in Real GDP, we can say that ΔY = $90 billion and ΔT = $10 billion. Rearranging the formula we get: MPC = (ΔY/ΔT) - 1 = (90/10) - 1 = 9. Therefore, the tax multiplier is (1/1-0.9) = 10.

A $10 Billion Reduction in Taxes Increases Real GDP by $90