Question

If the marginal propensity to consume (MPC) is 0.8 and taxes decrease by $200, then real GDP will: Please choose the correct answer from the following choices, and then select the submit answer button. Answer choices increase by $200. increase by $800. decrease by $200. decrease by $800.

Answer 1

Answer:

increase by $800

Explanation:

if taxes decrease by 200 then

GPD x tax multipler = net impact on GDP

the tax multiplier is calculated as follows:

$\frac{MPC}{1 - MPC}$

$\frac{0.8}{1 - 0.8} = \frac{0.8}{0.2}$

multiplier = 4

tax variation x multiplier

200 x 4 = 800

As the taxes decreases the effect on the GDP is positive.