Question

Assuming no change in government spending, an decrease in taxes of $100 billion with an MPC of 0.90 will add a total of $_____________ billion to the economy after the multiplier effect.
A. 800
B. 400
C. 500
D. 900

Answer 1

Answer:

D. 900

Explanation:

MPC = 0.90

The multiplier = MPC \ {1 - MPC} = 0.90 / (1-0.90) = 0.90 / 0.10 = 9

The Effect = Decrease in taxes * Spending multiplier

The Effect = $100 * 9

The Effect = $900

So, an decrease in taxes of $100 billion with an MPC of 0.90 will add a total of $900 billion to the economy after the multiplier effect.