Question

Multiple Choice: 1) Assume the MPC is 0.75 and lump sum taxes are collected by the government. What is the government tax multiplier? A)-1.33 B) - 25 C) - 75 D) -4 E) -3 , which the recessionary gap. 2) During a Recession, the MPC tends to a) Increase, increases b) Decrease, decreases c Decrease, increases d) Increase, decreases 3) Suppose that the MPC is.75 and the US Federal Government reduces taxes by 10 million dollars. After 3 rounds of the multiplier process RGDP will change by dollars. a) 4.23 million b) 17.34 million c) 23.13 million d) 30 million 4) "George W. Bush's $152 billion tax rebate plan of 2008 was designed to stimulate the U.S. economy, but it didn't work." The tax cut didn't work because a) it wasn't big enough b) people chose to save the tax cut c) it created a budget deficit d) other policies offset it

Answer 1

1. The correct answer is 'Option E'.

The government tax multiplier can be calculated by the following formula:

$\fn_phv Tax\: Multiplier=-\frac{MPC}{MPS}$

It is known that MPS + MPC = 1

MPC is given as 0.75. So, MPS = 1 - MPC = 1 - 0.75 = 0.25

Putting the values:

$\fn_phv Tax\: Multiplier=-\frac{0.75}{0.25}=-3$

So, the value of government tax multiplier is -3.