Homework Answers
Reduction in taxes = 60 billion
MPC = 0.6
Increase in disposable income = Tax cuts = 60 billion
Increase in consumption spending = Increase in disposable income * MPC = 60 billion * 0.6 = 36 billion
Therefore, when there is a tax cut of 'X', the consumer spending increases by 'MPC times X'
Tax cut multiplier = MPC * Expenditure multiplier = MPC * (1/(1-MPC)) = MPC/(1-MPC) = 0.6/(1-0.6) = 0.6/0.4 = 1.5
Increase in GDP due to the tax cut = Reduction in taxes * Tax cut multiplier = 60 billion * 1.5 = 90 billion
Ans: Increase by 36, increase by 90
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