# Suppose the GDP is in equilibrium at full employment and the MPC is .80. If government wants to...

Suppose the GDP is in equilibrium at full employment and the MPC is .80. If government wants to increase its purchase of goods and services by $16 billion without causing either inflation or unemployment, taxes should be: A. Increased by$20 billion B. Reduced by $16 billion C. Increased by$16 billion D. Reduced by $20 billion ## Gross Domestic Product: Gross domestic product (GDP) is a way to measure the income of a country in a financial year. It shows the performance of a country that how much change occurs in a country in terms of their income. There are three ways to calculate GDP, such that the value-added method, income method, and expenditure method. ## Answer and Explanation: Suppose the GDP is in equilibrium at full employment, and the MPC is .80. If the government wants to increase its purchase of goods and services by$16 billion without causing either inflation or unemployment, taxes should be: A. Increased by \$20 billion

Given:

• GDP is in equilibrium at full employment
• MPC is 0.80
• Government spending increased by 16 billion

Change in government spending should equal the marginal propensity to consume multiplied by the change in taxes.

Increase in the taxes will be:

{eq}\begin{array}{c} {\rm{16 billion = 0}}{\rm{.8*change in taxes}}\\ {\rm{change in taxes = }}\frac{{{\rm{0}}{\rm{.8}}}}{{{\rm{16 billion}}}}\\ {\rm{change in taxes = 20 billion}} \end{array} {/eq} 