Answer:
Total change in GDP= $360
Explanation:
To calculate the effect of an increase in public spending and an increase in taxes, we need to calculate the respective multipliers.
Tax multiplier represents the multiple by which gross domestic product (GDP) increases (decreases) in response to a decrease (increase) in taxes.
The formula is:
TMs=MPC/MPS=MPC/(1-MPC)
TMs= is the simple tax multiplier;
MPS= marginal propensity to save (MPS); and
MPC= marginal propensity to consume.
Spending multiplier represents the multiple by which GDP increases or decreases in response to an increase and decrease in government expenditures and investment.
The formula is:
Spending multiplier= 1/MPS=1/(1-MPC)
Tax multiplier= 0,75/0,25= 2,8
Spending multiplier= 1/0,25=4
Change in GDP (by tax increase)= tax multiplier*change in tax
=2,8*(-300)=-840
Change in GDP (by government spending increase)= spending multiplier*increase in government spending =4*300=$1200
<u>Total change in GDP</u>=1200-840= $360
