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

Question:

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}


Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
63K

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