If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should _____ taxes by _____ .
A)decrease; more than $25 billion
B)decrease; less than $25 billion
C)increase; more than $25 billion
D)increase; less than $25 billion

Question

Quizplus · Accepted Answer

To increase real GDP by $100 billion with an MPC of 0.75, the tax multiplier is -MPC/(1-MPC) = -3. Reducing taxes by more than $25 billion will achieve the desired increase in GDP.

If Policy Makers Want to Increase Real GDP by $100