If current output is $40b less than Potential GDP, how much would congress need to decrease taxes by to correct this short-run economic fluctuation given that the MPC is 0.75?

Reduction in Tax Needed = $ 13.33

Explanation:

Tax Multiplier shows magnitude of change (decrease) in income due to tax change (rise).

Tax Multiplier = ΔY / ΔT = - MPC / (1 - MPC)

Given : Change in Income needed [ΔY] = 40

MPC = 0.75

Putting in formula;

40 / ΔT = - 0.75 / (1 - 0.75)

40 / ΔT = - 0.75 / 0.25

40 / ΔT = - 3

ΔT = - 40 / 3

ΔT = - 13.33