If MPC = .5,a simultaneous increase in both taxes and government spending of $20 will:
A) decrease GDP by $20.
B) decrease GDP by $40.
C) increase GDP by $20.
D) increase GDP by $40.

Question

Quizplus · Accepted Answer

With an MPC of 0.5, the multiplier is 2. An increase in government spending of $20 increases GDP by $40, while an increase in taxes of $20 decreases GDP by $20. The net effect is an increase in GDP by $20.

If MPC = 5,a Simultaneous Increase in Both Taxes and Government Spending of Government