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24 May, 08:45

The marginal propensity to consume is 0.75 and the economy is operating at full-employment real GDP at $510 billion. If a $20 billion personal consumption increase is matched by an equal increase in personal taxes, long-run real GDP will

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  1. 24 May, 09:30
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  2. 24 May, 10:42
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    Long run real GDP will remain unchanged.

    Explanation:

    The increase in personal taxes (-$20 billion) would offset any increase in real GDP generated by the increase in private consumption ($20 billion). Nominal GDP can be affected and increase by $20 billion, but the effect would be given by an increase in general price level (inflation), not by an increase in real money.
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