Suppose that a $30 billion increase in government spending increases Real GDP by $150 billion,and that a $10 billion tax reduction increases Real GDP by $60 billion. In this situation,the tax multiplier is _______________ the government spending multiplier.

Question

Quizplus · Accepted Answer

The spending multiplier is calculated as the change in Real GDP divided by the change in government spending. Therefore, the spending multiplier in this scenario is 150/30 = 5.

The tax multiplier is calculated as the change in Real GDP divided by the change in taxes. Therefore, the tax multiplier in this scenario is 60/10 = 6.

Since the tax multiplier is greater than the spending multiplier, we can conclude that the answer is B, which stands for "greater than".

Suppose That a $30 Billion Increase in Government Spending Increases