If the economy's MPC is 0.75, a tax decrease of $6.67 billion would correct a recessionary gap of $ billion.
Question
Solution
The question is asking for the impact of a tax decrease on a recessionary gap given a Marginal Propensity to Consume (MPC) of 0.75.
The formula to calculate the change in GDP (ΔY) due to a change in taxes (ΔT) is given by the Tax Multiplier, which is -MPC/(1-MPC).
Step 1: Calculate the Tax Multiplier The Tax Multiplier = -MPC/(1-MPC) = -0.75/(1-0.75) = -3
Step 2: Calculate the change in GDP (ΔY) ΔY = Tax Multiplier * ΔT = -3 * -20.01 billion
So, a tax decrease of 20.01 billion.
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