If the MPC is .90 and net taxes are decreased by $3 billion, using the tax multiplier what impact does this tax cut have on real GDP?
- print Print
- list Cite
Expert Answers
calendarEducator since 2009
write35,413 answers
starTop subjects are History, Literature, and Social Sciences
In order to understand what impact this action has on gross domestic product (GDP), we must first determine what the multiplier is in this situation. The formula for the multiplier is
Tax multiplier = 1- spending multiplier.
To calculate the value of the tax multiplier, then, we must first calculate the spending multiplier. We use the formula:
Spending multiplier = 1/(1-MPC).
Since you have given us the MPC (marginal propensity to consume), we can calculate the multiplier. Using the figure given for MPC, we have the equation
Spending multiplier = 1/(1-.9) = 1/.1 = 10
Using that number, we can find the tax multiplier. Using the formula above:
Tax multiplier = 1 – spending multiplier = 1-10 = -9
The tax multiplier, then, is -9. This means that every dollar of change in the net tax will result in a $9 change in GDP. Please note that the change in GDP will be in the opposite direction of the change in tax. When taxes go up, GDP goes down. When taxes go down, GDP goes up.
To find the exact change in GDP, we use the formula
Change in taxes x tax multiplier = change in GDP
Using the information we have:
-$3 billion x -9 = change in GDP
Change in GDP = $27 billion.
This tax cut, then, will increase GDP by $27 billion.
Related Questions
- The MPC is .89 and the government has cut spending by $4 billion. Using the simple multiplier...
- 1 Educator Answer
- If government purchases decrease by $10 billion with other factors held constant, calculate the...
- 4 Educator Answers
- If MPC is .07 and a decrease in the interest rate causes investment spending to increase by $4...
- 1 Educator Answer
- If the MPC is .67 and investment spending decreases by $25 billion, then what would be the...
- 3 Educator Answers
- By how much would government spending have to increase to achieve the goal in the following...
- 2 Educator Answers