Explore BrainMass
Share

Explore BrainMass

    Fiscal effect of an increase in taxes

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    A government is currently operating with an annual budget deficit of $40 billion. The government has determined that:

    --The marginal propensity to consume is 0.75.
    --To eliminate an inflationary gap and take into account the resulting change in the price level, the government must generate a net leftward shift in the aggregate demand curve equal to $40 billion.

    Assuming that there are no direct expenditure offsets to fiscal policy, how much should the government increase taxes? Explain by giving appropriate reasons.

    © BrainMass Inc. brainmass.com October 10, 2019, 6:20 am ad1c9bdddf
    https://brainmass.com/economics/expenditure-multipliers/fiscal-effect-of-an-increase-in-taxes-540352

    Solution Preview

    If MPC is 0.75, then the economy's Spending Multiplier (SM) is 1/(1-MPC) = 1/0.25 = 4
    The Tax Multiplier (TM) = 1 ...

    Solution Summary

    This solution gives detailed calculations showing how to determine the total effect on Aggregate Demand of a tax increase.

    $2.19