Question

Suppose the M P C is 0.8 and the current tax rate is 25 % . What is the government purchases multiplier? Specify all answers to two decimal places. G P M = If the tax rate increases to 35 % , all else remaining equal, what is the government purchases multiplier? G P M = Choose the answer that best describes the relationship between the changes in the tax rate and the government purchases multiplier, assuming all else remains equal. Increases in the tax rate decrease the government purchases multiplier. Increases in the tax rate increase the government purchases multiplier. The government purchases multiplier is not affected by the tax rate.

Answer 1

Answer:

Therefore, Increases in the tax rate decrease the government purchases multiplier

Explanation:

Given that

MPC = 0.8

Tax rate t = 0.25

tax rate is increases by 35%

Government purchases multiplier

= 1 ÷ 1 - MPC × (1 - t). Here

So, GPM = 1 ÷ 1 - 0.8 × (1 - 0.25) = 2.5

Government purchases multiplier

= 1 ÷ 1 - MPC × (1 - t)

MPC = 0.8

tax rate t = 0.35

GPM = 1 ÷ 1 - 0.8 × (1 - 0.35)

= 2.08333

= 2.083

Therefore, Increases in the tax rate decrease the government purchases multiplier.