posted by Ryan on .
it is felt gdp needs to increase by 700 in order to reach a full employment level by how much must government change taxes if they intend to increase spending on national defence by 120? they feel that the MPC in the country is .9 and they want to close the recessionary gap.
I presume you are in a basic economics course, where basic and simple multiplier concepts are presented. (As you advance in econ, the analysis and answered become much more complicated.
The government spending multiplier is 1/MPS = 1/(1-MPC) = 1/.1 = 10
So, increases in national defense by 120 will raise gnp by 1200.
Now then, the tax multiplier is the government multiplier less 1. In this example tax multiplier is 9. So, raising taxes by 55.55 leads to a drop in gnp by 500.