Question

Suppose that the economy is experiencing a recession with an estimated recessionary gap of $10 billion. Congress is considering the use of fiscal policy to ease the recession, but due to current political sentiments, it has determined that the maximum spending increase the government is willing to support is $3 billion. It wants to make up the remainder of the recessionary gap using tax cuts.
If a spending increase of $3 billion is approved and the MPC is 0.6, by how much will taxes need to be reduced to close the remainder of the recessionary gap?

Answer 1

Answer:

4.66 billion

Step-by-step explanation: