The introduction of a $100 autonomous net tax in an economy with an MPC equal to 0.8 will,at each level of real GDP,
A)increase equilibrium real GDP demanded by $100
B)decrease equilibrium real GDP demanded by $100
C)increase equilibrium real GDP demanded by more than $100
D)decrease equilibrium real GDP demanded by less than $100
E)decrease equilibrium real GDP demanded by more than $100

Question

Quizplus · Accepted Answer

The tax multiplier is negative and calculated as -MPC/(1-MPC). With an MPC of 0.8, the tax multiplier is -4. Thus, a $100 tax will decrease GDP by $400, which is more than $100.

The Introduction of a $100 Autonomous Net Tax in an Economy