Suppose that the MPC is .80 and taxes increase by 500. Using the simple multiplier, output...

Suppose that the MPC is .80 and taxes increase by 500. Using the simple multiplier, output would change by Group of answer choices -2500

-2000

-1600

-400

Expert Solution

Marginal Propensity to Consume is the proportion of an increase in income that gets spent on consumption.

Tax multiplier represents the multiple by which gross domestic product (GDP) increases (decreases) in response to a decrease (increase) in taxes

MPC = 0.80

Tax Multiplier = - MPC / 1 - MPC

= -0.80 / 1 - 0.80

= -0.8 / 0.2

= -4

Taxes increase by 500

GDP will decrease = Tax Multiplier * Increase in Taxes

= -4 * 500 = - 2000

Option B ie -2000 is Correct

GDP or output will change by -2000 or we can say GDP will decrease by -2000

Rahul Sunny answered 2 years ago

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