Question

Suppose the GDP is in equilibrium at full employment and the MPC is .80. If government wants to increase its purchase of goods and services by $16 billion without causing either inflation or unemployment, taxes should be: A. Increased by $20 billion B. Reduced by $16 billion C. Increased by $16 billion D. Reduced by $20 billion

Answer 1

A) increased by $20 billion

Step-by-step explanation:

The Change in government spending should have a corresponding increase of the MPC multiplied by the change in taxes.

Therefore,

$16billion = 0.8 × change in taxes

Change in taxes = $16billion /0.8 = $20 billion(increase)