Question

please answer b only

Mpc Suppose it was found that the mpc varied by income level in the following manner, with lower income households spending a greater portion of every dollar of income than higher income households. Household income MPC 0-$30,000 $31,000-50,0000.80 $51,000-80,000 0.75 $81,000 and above 0.60 Spending multiplier Tax multiplier。 oa 0.90 a. Calculate the government spending and tax multipliers for each income bracket, considered separately. nt decided to use tax cuts to expand the economy, and was b. Suppose the governme to direct tax cuts to high income households or low-income debating whether households. Which choice would provide a great the least amount of da er stimulus? Thus, which would do mage to the government budget deficit to achieve a given amount of stimulus?

Answer 1

B) tax multiplier is higher at lower levels of income. It decreases as income increases.

Change in gdp = tax multiplier * (change in taxes)

Thus higher the tax multiplier lower is the change in taxes required to get the desired change in gdp.

So government should cut taxes to low income household.