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6 April, 19:57

Suppose the government increases taxes by $11110 billion and the marginal propensity to consume is 0.990. By how will equilibrium GDP change?

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  1. 6 April, 20:38
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    - $1,099,890 billion.

    Explanation:

    Marginal propensity to consume (MPC) = 0.990

    Tax multiplier = - MPC : (1 - MPC)

    = - 0.990 : (1 - 0.990)

    = - 9 9

    change in GDP = Change in taxes * Tax multiplier

    = $11110 * (-99)

    = - $1,099,890

    the minus sign shows a decrease

    Hence, the change in equilibrium GDP is - $1,099,890 billion.
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