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In an open economy mpc is seven tenths and mpi is two tenths The economy is initially in equilibrium What is the effect on GDP of reducing net tax by 10 billion?
Ihfh26635
the multiplier is 1/(MPC+MPI) which in this case is 1/0.1 = 10
the net effect on GDP is 10 billion * 10 = 100 billion.
this is under the assumption that government spending has not reduced by 10billion to cover the reduced revenue. If this occured the net change would be zero.
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