Question

In an economy, the government wants to decrease aggregate demand by $24 billion at each price level to decrease real GDP and control demand-pull inflation. If the MPC is .75, then it could increase taxes by: 
A. $6 billion
B. $8 billion
C. $10 billion
D. $12 billion

Answer 1

Answer:

option b is correct answer

Explanation:

given data:

MPC = 0.75

We know that

MPC +MPS =1

So, MPS = 1 - 0.75 = 0.25

We know that tax multiplier is given as

Tax multiplier $= \frac{-MPC}{(1-MPC)}$

                       = $\frac{-0.75}{(1-0.75)}$

                       = -3

 change in taxes$= \frac{24}{-3} = -8$Billion

therefore, tax increase by $8 billion.

option b is correct answer