If the absolute value of the tax multiplier equals 1.6,real GDP is $13 trillion,and potential GDP is $13.4 trillion,then taxes would need to be cut by ________ to restore the economy to potential GDP.
A) $250 billion
B) $400 billion
C) $640 billion
D) None of these options is correct. Taxes should be increased in this case.

Question

Quizplus · Accepted Answer

To restore the economy to potential GDP, the gap of $0.4 trillion ($13.4 trillion - $13 trillion) needs to be closed. With a tax multiplier of 1.6, a tax cut of $250 billion will increase GDP by $0.4 trillion (1.6 * $250 billion = $400 billion).

If the Absolute Value of the Tax Multiplier Equals 1