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Suppose the government reduces taxes by $20 billion and the MPC is 0.75. A. What is the total effect of this tax cut on equilibrium output? B. How does the total effect of this $20 billion tax cut compare to the total effect of a $20 billion increase in government purchases? Why?

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Suppose the government reduces taxes by $20 billion and the MPC is 0.75.

A. What is the total effect of this tax cut on equilibrium output?

B. How does the total effect of this $20 billion tax cut compare to the total effect of a $20 billion increase in government purchases? Why?

 
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