Wondering if I am doing this correctly??
If net taxes are increased by 3 billion dollars by how much would we expect real GDP to change?
My answer is: d) If the government increases taxes by 3 billion dollars we would use the tax multiplier to determine what the change in GDP would be. NT=-MPC/1-MPC=
3 *.78/1-.78= .78/, 22=4*3 = 12 billion increase in GDP.
Your answer is almost correct, but there seems to be a small error in your calculation. Let me walk you through the correct steps to find the change in real GDP when net taxes are increased by 3 billion dollars.
To determine the change in GDP, we need to use the tax multiplier, which is derived from the marginal propensity to consume (MPC). The formula for the tax multiplier is:
Tax Multiplier = 1 / (1 - MPC)
In your answer, you correctly used an MPC value of 0.78. However, the calculation seems to have a mistake. Here's the corrected calculation:
Tax Multiplier = 1 / (1 - 0.78) = 1 / 0.22 = 4.55 (approximately)
To find the change in GDP, we multiply the change in net taxes (3 billion dollars) by the tax multiplier:
Change in GDP = Change in Net Taxes * Tax Multiplier
Change in GDP = 3 billion * 4.55
Change in GDP = 13.65 billion (approximately)
Therefore, if net taxes are increased by 3 billion dollars, we would expect real GDP to increase by approximately 13.65 billion dollars.
It's important to double-check your calculations to ensure the accuracy of your answer.