real GDP = (Change in Taxes) X Change in equilibrium (Tax Multiplier) Change in equilibrium real GDP = (Change in Taxes) X (- MPC/MPS) *Note, when taxes are decreasing, then the change in
real GDP = (Change in Taxes) X Change in equilibrium (Tax Multiplier) Change in equilibrium real GDP = (Change in Taxes) X (- MPC/MPS) *Note, when taxes are decreasing, then the change in
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The answer I put ($460) was incorrect. Please help me find the correct answer. Thank you so much.
![### Understanding the Impact of Changes in Taxes on Equilibrium Real GDP
The equilibrium real GDP can be influenced by changes in tax policies. The following formulas illustrate how changes in taxes impact equilibrium real GDP:
#### Formula 1:
\[ \text{Change in equilibrium real GDP} = (\text{Change in Taxes}) \times (\text{Tax Multiplier}) \]
#### Formula 2:
\[ \text{Change in equilibrium real GDP} = (\text{Change in Taxes}) \times \left( - \frac{\text{MPC}}{\text{MPS}} \right) \]
**Note**: If taxes are decreasing, the value for the change in taxes will be negative in the formula.
### Explanation of Terms:
- **Change in Taxes**: The difference in the tax amount (could be an increase or decrease).
- **Tax Multiplier**: A coefficient that describes how a change in taxes influences total economic output.
- **MPC (Marginal Propensity to Consume)**: The fraction of additional income that consumers spend on goods and services.
- **MPS (Marginal Propensity to Save)**: The fraction of additional income that consumers save.
When the government alters tax rates, it directly affects disposable income and consumption, which in turn affects the overall GDP:
- **Positive Change in Taxes**: Typically, this signifies an increase in taxes.
- **Negative Change in Taxes**: This represents a decrease in taxes.
Using these principles, you can analyze and predict how fiscal policies such as tax changes will affect the economy's total output.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fdbf8765a-c0ab-46fe-8663-61e338d72b7c%2F1ad3f7b1-aa6e-41a9-9202-2bb95dbeecdb%2Fp5diyke_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Understanding the Impact of Changes in Taxes on Equilibrium Real GDP
The equilibrium real GDP can be influenced by changes in tax policies. The following formulas illustrate how changes in taxes impact equilibrium real GDP:
#### Formula 1:
\[ \text{Change in equilibrium real GDP} = (\text{Change in Taxes}) \times (\text{Tax Multiplier}) \]
#### Formula 2:
\[ \text{Change in equilibrium real GDP} = (\text{Change in Taxes}) \times \left( - \frac{\text{MPC}}{\text{MPS}} \right) \]
**Note**: If taxes are decreasing, the value for the change in taxes will be negative in the formula.
### Explanation of Terms:
- **Change in Taxes**: The difference in the tax amount (could be an increase or decrease).
- **Tax Multiplier**: A coefficient that describes how a change in taxes influences total economic output.
- **MPC (Marginal Propensity to Consume)**: The fraction of additional income that consumers spend on goods and services.
- **MPS (Marginal Propensity to Save)**: The fraction of additional income that consumers save.
When the government alters tax rates, it directly affects disposable income and consumption, which in turn affects the overall GDP:
- **Positive Change in Taxes**: Typically, this signifies an increase in taxes.
- **Negative Change in Taxes**: This represents a decrease in taxes.
Using these principles, you can analyze and predict how fiscal policies such as tax changes will affect the economy's total output.
Transcribed Image Text:### Economic Problem Example
**Problem Statement:**
Suppose that a certain country has a Marginal Propensity to Consume (MPC) of 0.9 and an equilibrium real GDP of $500 billion. If the government decreases taxes by $4 billion, what will be its new equilibrium real GDP?
**Instructions:**
Enter your answer as a whole number.
**Solution:**
New Equilibrium Real GDP = $_______ billion.
**Answer:**
New Equilibrium Real GDP = $460 billion.
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