Suppose the marginal propensity to consume is 0.7 and the government votes to increase taxes by...

Question

Question

Suppose the marginal propensity to consume is 0.7 and the government votes to increase taxes by $1.5 billion. Round to the ne

Answer 1

Answer #1

Tax multiplier = $\Delta$ Y/ $\Delta$ T

$\Delta$ Y/ $\Delta$ T = -c/(1- c)

c = MPC = 0.7

$\Delta$ Y/ $\Delta$ T = - 0.7/(1- 0.7)

= - 0.7/0.3

= - 2.3

ii) $\Delta$ Y/ $\Delta$ T = - 2.333333

$\Delta$ T = 1.5 billion

$\Delta$ Y/ $\Delta$ T

$\Delta$ Y/1.5 = - 2.333333

$\Delta$ Y = - 2.333333(1.5)

= - 3.5

which means equilibrium quantity of real GDP falls by 3.5 billion

Answer 2

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