There is a necessary gap of $500 million in real output. The marginal propensity to save...

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There is a necessary gap of $500 million in real output. The marginal propensity to save...

There is a necessary gap of $500 million in real output. The marginal propensity to save is .125. If a change in tax revenue is prescribed by the government, how much should the government decrease tax revenue?

business economics

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Answer 1

Answer #1

Tax multiplier = - (1 - MPS) / MPS = - (1 - 0.125) / 0.125 = - 0.875 / 0.125 = - 7

Required decrease in tax = 500 m / 7 = 71.4285 m

= 71.43 m

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Answer 2

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Add Answer to: There is a necessary gap of $500 million in real output. The marginal propensity to save...

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