Question

Suppose government belives the simple Keynesian model is descriptive of the current economy. Conress wants to lower Real Gdp by $100 billion. The marginal propensity to consume is 0.80 Congress raises tax by:______
a. $28 billion
b. $15 billion
c. $29 billion
d. $22 billion
d. None of the above

Answer 1

Answer:

d. None of the above

Explanation:

if the marginal propensity to consume = 0.80, the Keynesian's multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 1 / 0.2 = 5

that means that if Congress wants to decrease real GDP by $100 billion and the Keynesian's multiplier is 5, then it should raise taxes by $20 billion. This way -$20 billion (taxes take away money from the economy) x 5 = -$100 billion.