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

Question

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23 May, 10:40

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

+3

Answers (1)

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Libby Buckley · 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.