A recessionary gap of $40 billion is present in the economy and MPC is 0.75. How could Congress close the gap using a change in taxes

The congress would close the gap using a change in taxes by decreasing taxes in such a way that consumers are going to be more likely to spend money which is going to end up shifting the aggregate demand curve outwards or to the right.

40billion/(mpc/1-mpc)

= 40/0.75/0.25

= 40/3

= 13.33 billion dollars

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Parrain Parrain · Answer 2 · 2022-01-14T11:46:03+01:00

The recessionary gap can be closed by Congress reducing taxes by a sum of $13.33 billion.

Amount to change taxes by

The amount to change taxes by can be found by the formula:

= Recessionary gap / Tax multiplier

Tax multiplier = MPC / ( 1 - MPC)

Taxes should be changed by:

= 40 billion ÷ (0.75 / ( 1 - 0.75))

= $13.33 billions

Taxes are decreased when a recessionary gap should be closed so Congress should reduced taxes by $13.33 billion.

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