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Sindrei [870]
2 years ago
15

If current output is $40b less than Potential GDP, how much would congress need to decrease taxes by to correct this short-run e

conomic fluctuation given that the MPC is 0.75?
Business
1 answer:
malfutka [58]2 years ago
6 0

Answer:

Reduction in Tax Needed = $ 13.33

Explanation:

Tax Multiplier shows magnitude of change (decrease) in income due to tax change (rise) .

Tax Multiplier = ΔY / ΔT = - MPC / (1- MPC)

Given : Change in Income needed [ΔY] = 40

MPC = 0.75

Putting in formula ;

40 / ΔT  = - 0.75 / (1- 0.75)

40 / ΔT = - 0.75 / 0.25

40 / ΔT  =  - 3

ΔT = - 40/ 3

ΔT = - 13.33

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