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20 December, 00:19

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

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  1. 20 December, 00:34
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    A) increased by $20 billion

    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)
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