Tax multiplier practice problems

Macroeconomics Unit 3. Try each one, then open the worked solution. The Credit Sprint app generates unlimited new versions with fresh numbers.

Problem 1.

The MPC is 0.9. Taxes are cut by $30 billion. What is the maximum increase in real GDP?

Show solution

Tax multiplier = 0.9 ÷ 0.1 = 9. 9 × $30B = $270B.

Problem 2.

The MPC is 0.75. Taxes are cut by $45 billion. What is the maximum increase in real GDP?

Show solution

Tax multiplier = 0.75 ÷ 0.25 = 3. 3 × $45B = $135B.

Problem 3.

The MPC is 0.5. Taxes are cut by $40 billion. What is the maximum increase in real GDP?

Show solution

Tax multiplier = 0.5 ÷ 0.5 = 1. 1 × $40B = $40B.

Problem 4.

The MPC is 0.9. Taxes are cut by $20 billion. What is the maximum increase in real GDP?

Show solution

Tax multiplier = 0.9 ÷ 0.1 = 9. 9 × $20B = $180B.

Problem 5.

The MPC is 0.75. Taxes are cut by $45 billion. What is the maximum increase in real GDP?

Show solution

Tax multiplier = 0.75 ÷ 0.25 = 3. 3 × $45B = $135B.

Problem 6.

The MPC is 0.9. Taxes are cut by $30 billion. What is the maximum increase in real GDP?

Show solution

Tax multiplier = 0.9 ÷ 0.1 = 9. 9 × $30B = $270B.