A state policymaker is thinking about reducing taxes to boost the local GDP. However, she is...

A state policymaker is thinking about reducing taxes to boost the local GDP. However, she is concerned about negative effects on the budget and orders a survey to gauge her voter’s consumption behaviour. The relevant information is summarized below.

C = 600 + 0.8(DI)

Multiplier:

1 / 1−mpc

14. What is the size of the multiplier?

15. Assume she goes through with her plan and reduces taxes. As a consequence, she generates a tax revenue of T=100. By how much will consumption increase? By how much Savings?

16. Use your results from Q14 and Q15 to calculate the eventual increase in GDP resulting from the tax policy.

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Expert Solution

Rahul Sunny answered 1 year ago

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