Question

If the tax multiplier is 1. 5 and a $200 billion tax increase is implemented, what is the change in gdp, holding all else constant? (assume the price level stays constant. ).

Answer 1

Based on the information given  the change in GDP, holding all else constant is a $300 billion increase in GDP.

Using this formula

Change in GDP=Tax increase× Tax multiplier

Where:

Tax increase=$200 billion

Tax multiplier=1.5

Let plug in the formula

Change in GDP=$200 billion×1.5

Change in GDP=$300 billion increase

Inconclusion the change in GDP, holding all else constant is a $300 billion increase in GDP.

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