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 changing equilibrium gdp, taxes should be

Question

Alvaro Valenzuela

Business

22 December, 08:59

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 changing equilibrium gdp, taxes should be

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Dominique Reed · Answer 1

The marginal propensity to consume is a metric that quantifies the concept of increase in consumption with an increase in income. Mathematically MPC is defined as:

MPC = Change in consumption / Change in income

Purchase of goods and services is considered as consumption, therefore:

Change in consumption = $16 billion

In the government’s perspective, taxes are considered as income, therefore the problem ask us to find for the necessary change in tax collection to maintain equilibrium GDP. Substituting the values in the formula:

0.80 = $16 billion / Change in income

Change in income = $20 billion

Therefore the government should increase the tax collection by $20 billion.