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According to the Keynesian Spending Multiplier Formula, a decrease in MPC, and increased tax rates will...

According to the Keynesian Spending Multiplier Formula, a decrease in MPC, and increased tax rates will be good for the growth of the U.S. economy and it will increase the Gross Domestic Product (GDP).

1
____________________ X (C + I + G +/- International Trade) = Aggregate Demand

1 - MPC X (1 - tax rate)

True or False?

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Answer #1

The GDP can be defined the market value of all goods and services which are produced in the domestic territory of the country in the current financial years. GDP by Expenditure method

GDP at MP=C+I+G+(X-M)

MPC=change in consumption / change in disposable income

MPS=1-MPC

Spending Multiplier=1/MPS

Since MPC and spending multiplier is MPC are positively related and MPS and spending multiplier is negatively related.

Tax multiplier=-MPC/MPS

So with the decrease in MPC, value of tax multiplier will decrease but negative sign will be there.

So when government increase tax rates, then disposable income of people will decrease and consumption will decrease. Hence GDP will decrease but it will decrease slowly due to lower tax multiplier. Hence this will lead to decrease in the US GDP.

Hence the given statement is false.

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