Question

Assume that the marginal propensity to consume is 0.90. As a result of an increase in the tax rates, the government collects an additional $20 million. What will be the impact on gross domestic product (GDP)

Answer 1

The impact on gross domestic product (GDP) is: GDP will decrease by a maximum of $180 million.

Gross domestic product (GDP):

First step:

rGDP = (MPC/MPS)change in taxes

Where:

MPC = .90

MPS = .10

rGDP = (MPC/MPS)change in taxes

rGDP=.90/.10

rGDP=9

Second step:

Gross domestic product (GDP)= (9)20 million

Gross domestic product (GDP)= 180 million (Decrease)

Inconclusion the impact on gross domestic product (GDP) is: GDP will decrease by a maximum of $180 million.

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