Suppose the Payroll tax reduction for middle-income households has been extended in the amount of $200 billion for the remainder of 2018. Assuming the MPC for that income group of households is 0.8 and also assuming that other things stay the same, the increase in GDP under this proposed extension of tax break is expected to increase by (ΔY) _______ 1 pt a. $2,000 billion
Hint: Need to use tax multiplier and it is a negative tax.
Solution: $1,000 billion
Working:
Multiplier = 1 / (1-MPC) = 1/MPS
= 1 / (1-0.8) = 5
Therefore an increase in GDP under this proposed extension of tax break is expected to raise ΔY by 1,000 billion (=200 billion * 5)
Suppose the Payroll tax reduction for middle-income households has been extended in the amount of $200...
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