Answered: Suppose the MPC is 0.8. What is the tax…

Suppose the MPC is 0.8. What is the tax multiplier in this economy? If the government were to lower taxes by $250 in this economy how much would Total Spending change as a result? Show your work.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section11.A: Graphical Treatment Of Taxes And Fiscal Policy

Problem 3TY

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Question

Suppose the MPC is 0.8. What is the tax multiplier in this economy? If the government were to lower taxes by $250 in this economy how much would Total Spending change as a result? Show your work.

Expert Solution

Step 1.

Tax multiplier = - MPC / (1 - MPC)

= - 0.8 / (1 - 0.8)

= - 0.8 / 0.2

= - 4

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