Question

In an​ economy, government spending​ (G) and taxes​ (T) are independent of income. The value of MPC is known to be 0.75. If government spending increases by ​$20 ​billion, the amount by which taxes must be adjusted so that income or output​ (Y) does not​ change, to curb possible inflationary​ pressure, is: Upper Delta Upper T = __.

Answer 1

Answer:

AMOUNT BY WHICH TAX MUST ADJUSTED  SUCH THAT THERE WILL BE NO CHANGE IN INCOME IS $26.6

Explanation:

Given data:

MPC = 0.75

spending of government is $20 billion

sepnding multiplier is calculated as

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

   $= \frac{1}{1 - 0.75} = 4$

Tax multuiplier

tax Multiplier $= \frac{MPC}{1 -MPC}$

                      $=\frac{0.75}{1 - 0.75} = 3$

increament in spending is $= 4 \times 20 = 80$ billion dollar

Tax required  $= \frac{80}{3} = 26.6$ billion dollar