Question

7. Suppose the Payroll tax reduction for middle-income households has been extended in the amount of $200 billion for the remainder of 2018. Assuming the MPC for that income group of households is 0.8 and also assuming that other things stay the same, the increase in GDP under this proposed extension of tax break is expected to increase by (ΔY) _______

Answer 1

ΔY = $800 billion

Step-by-step explanation:

given data

extended amount = $200 billion

income group = 0.8

to find out

increase GDP under this proposed extension of tax break is expected to increase by (ΔY)

solution

we know that here equation that is

`(\Delta Y)/(\Delta T) = (-MPC)/(1-MPC)` ........................1

here ΔT is given 200 and MPC is 0.8

so put here value we get

`(\Delta Y)/(\Delta T)= (-MPC)/(1-MPC)`

`(\Delta Y)/(200) = (-0.8)/(1-0.8)`

`(\Delta Y)/(200) = (-0.8)/(0.2)`

solve we get

ΔY = $800 billion