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If the MPC is 0.6 and taxes are cut by $2000, real GDP will: A. increase...

If the MPC is 0.6 and taxes are cut by $2000, real GDP will:
A.
increase by $1,500
B.
increase by $3,000
C.
increase by $750
D.
decrease by $750
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Answer #1

Given data is mentioned below

MPC = -0.6 ( A negative sign is prefixed as taxes are deducted)

the formula for the GDP = tax deduction[MPC/(1+MPC)] - (1).

Substitute the values in the equation (1).

GDP = -2000[-0.6/(1-0.6)] ( A negative sign is prefixed as taxes are deducted)

= 2000(1.5)

= $3,000.

Hence Option B (GDP increase by $3,000) is correct answer.

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