**MPC and GDP Impact**Given: The Marginal Propensity to Consume (MPC) is 0.875.**Question: When tax increases by $1, what is the impact on GDP?**- A) GDP will decrease by $8.- B) GDP will decrease by $7.- C) GDP will increase by $8.- D) GDP will increase by $7.**Analysis:**To determine the impact of a tax change on GDP, use the tax multiplier formula:\[ \text{Tax Multiplier} = -\frac{\text{MPC}}{1 - \text{MPC}} \]Substituting the given MPC of 0.875, calculate the potential changes in GDP when there is a $1 increase in taxes.This exercise aids in understanding the relationship between taxation, consumer spending, and economic output.

MPC = 0.875 Using the Tax multiplier formula

Answered: MPC is 0.875. When tax increases by $1,…

MPC is 0.875. When tax increases by $1, GDP will decrease by $8. by $1, GDP will decrease by $7. by $1, GDP will increase by $8. by $1, GDP will increase by $7.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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