Fiscal Policy and the Tax Multiplier Practice (2 of 2)- Macro Topic 3.8

The video tutorial explains how to use the spending multiplier to address a recessionary gap, initially by increasing government spending. It then shifts focus to using tax cuts as a method to close the gap, highlighting that tax cuts have a lesser effect than direct spending. The tutorial walks through calculations with different marginal propensities to consume (MPC), demonstrating how these affect the multiplier and the necessary tax cut to close a $40 billion gap.

Explain the effect of cutting taxes on the recessionary gap.

What is the spending multiplier and how is it calculated?

What happens when the government cuts taxes by 40 billion dollars?

How does the marginal propensity to consume affect the outcome of a tax cut?

Calculate the impact of a 10 billion dollar tax cut based on a marginal propensity to consume of 0.8.