Question

WILL MARK BRAINLIEST// PLEASE HELP ASAP <3

Suppose that a certain country has an MPC of 0.9 and a real GDP of $500 billion. If government decreases taxes by $4 billion, what will be its new level of real GDP?

Answer 1

The new level of the GDP will be $536 billion.

The Real GDP refers to an inflation-adjusted GDP that shows the value of all goods and services produced within the country's border.

• We are given that the Marginal Propensity to Consume (MPC) is 0.90

• The formula for Tax multiplier is -MPC/(1-MPC)

Tax multiplier = -0.9/(1-0.9)

Tax multiplier = -0.9 / 0.1

Tax multiplier = -9

• Now, the change in GDP if the taxes decreased by 4 billion will be $36 billion [-9*(-$4 billion)].

• Now, because the change is positive, then, its implies that the Real GDP will increase.

• The formula for New GDP is [Initial Real GDP + Change in GDP]

New GDP = $500 billion + $36 billion

New GDP = $536 billion

Therefore, the new level of the certain country real GDP is $536 billion.

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