The correct answer is 'If the MPC in an economy is 0.80, government could close a recessionary expenditure gap of $80 billion by cutting taxes by $100 billion.'
A change in income led to a proportionately smaller change in consumption if the MPC is less than one.
Multiplier = 1/(1-0.8)
Multiplier = 1/0.2
Multiplier = 5
Change in Spending= 80 x 0.2
Change in spending= 16
Change in GDP =Change in spending/MPC
Change in GDP=16/0.8
Change in GDP=20
So,Taxes Cut = $80 billion+$20billions
Taxes Cut = $100billion
Hence, if the MPC in an economy is 0.80, government could close a recessionary expenditure gap of $80 billion by cutting taxes by $100 billion.
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