Question

If the tax multiplier is minus1.5 and a​ $200 billion tax increase is​ implemented, what is the change in​ gdp, holding all else​ constant? ​ (you may assume the price level stays​ constant.)

a. a​ $300 billion increase in gdp
b. a​ $300 billion decrease in gdp
c. a​ $133.33 billion decrease in gdp
d. a​ $30 billion increase in gdp
e. a​ $133.33 billion increase in gdp

Answer 1

Tax multiplier = -1.5
Tax increase = $200 billion

Therefore, since the multiplier is a negative value, the GDP must have gone down.

GDP = Tax increase/Tax multiplier = 200/-1.5 = $133.33 billion decrease.
Then, the correct answer is c.