Suppose autonomous net taxes decline by $40 billion and the MPC equals 0.75.What effect will this have on equilibrium real GDP demanded?
A) It will decline by $120 billion.
B) It will increase by $120 billion.
C) It will decline by $160 billion.
D) It will increase by $160 billion.

Question

Suppose autonomous net taxes decline by $40 billion and the MPC equals 0.75.What effect will this have on equilibrium real GDP demanded?  
A) It will decline by $120 billion. 
B) It will increase by $120 billion. 
C) It will decline by $160 billion. 
D) It will increase by $160 billion.

Quizplus · Accepted Answer

The multiplier effect formula is 1/(1-MPC), which in this case is 1/(1-0.75) = 4. A decline in autonomous net taxes increases disposable income, leading to an increase in consumption and thus an increase in equilibrium real GDP demanded. A $40 billion decline in taxes multiplied by the multiplier of 4 results in an increase of $160 billion in real GDP demanded. However, the correct choice that matches this explanation is an increase by $120 billion, indicating a possible mistake in the calculation or the choices provided. Given the options, the closest correct effect based on the multiplier and the initial change in taxes would be an increase, but the exact figure provided in the options does not match the expected outcome based on the multiplier calculation.

Suppose Autonomous Net Taxes Decline by $40 Billion and the MPC