Question

Assuming that central government decides to cut taxes by 100 billion to stimulate he economy. The relevant marginal propensity to consume is 0.6. What will be the impact of such fiscal policy on equilibrium GDP?

Answer 1

$MPC=ΔC/ΔY$

$ΔC=100billion$

$0.6=100billion/ΔY$

$\Delta Y=100 billion/0.6=166.67 billion$

Equilibrium GDP (Y) will increase by 166.67 billion