Chapter 21, Problem 7MCQ

To determine

The correct option when MPC is 0.75 and government spending and taxes are both increased by $10 million.

Answer to Problem 7MCQ

From the available options, the correct option is real GDP will decrease by $10 million.

Explanation of Solution

When MPC is 0.75 and government spending and taxes are both increased by $10 million, then the real GDP will decrease by $10 million because increase in tax is responsible for the decrease in real GDP as increasing tax rate decrease the consumption in economy.

Therefore, the correct option is d (real GDP will decrease by $10 million) and all other options are incorrect because there will be no budget deficit and balanced because it avoids a higher level of debt in economy. And, there will be no negative, or positive multiplier because these effects happen when an initial reduction or increase in economic spending results in cascading effects and a larger final decline or increase in real GDP.

Economics Concept Introduction

Introduction: The marginal propensity to consume refers to the proportion of amount which is spent on consumption of goods and services rather than keeping the amount as savings.