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In an​ economy, government spending​ (G) and taxes​ (T) are independent of income. The value of MPC is known to be 0.75. If government spending increases by ​$20 ​billion, the amount by which taxes must be adjusted so that income or output​ (Y) does not​ change, to curb possible inflationary​ pressure, is: Upper Delta Upper T = __.

Respuesta :

Answer:

AMOUNT BY WHICH TAX MUST ADJUSTED  SUCH THAT THERE WILL BE NO CHANGE IN INCOME IS $26.6

Explanation:

Given data:

MPC = 0.75

spending of government is $20 billion

sepnding multiplier is calculated as

[tex]M = \frac{1}{1 -MPC}[/tex]

   [tex]= \frac{1}{1 - 0.75} = 4[/tex]

Tax multuiplier

tax Multiplier [tex]= \frac{MPC}{1 -MPC}[/tex]

                      [tex]=\frac{0.75}{1 - 0.75} = 3[/tex]

increament in spending is [tex]= 4 \times $20 = $80[/tex] billion dollar

Tax required  [tex]= \frac{80}{3} = 26.6[/tex] billion dollar

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