Question
Assume that an economy's real GDP multiplier is 2 and that this economy is in equilibrium at R500 billion. If the government wants to move this economy to full-employment at R600 billion, while maintaining a balanced budget, it must choose which of the following options?
Increase government spending and taxes by R100 billion
Decrease government spending and taxes by R100 billion
Increase government spending and taxes by R200 billion
Decrease government spending and taxes by R200 billion
Increase government spending and taxes by R100 billion
Decrease government spending and taxes by R100 billion
Increase government spending and taxes by R200 billion
Decrease government spending and taxes by R200 billion
Answers
GPT-5 mini
Increase government spending and taxes by R100 billion.
Reason: With a spending multiplier of 2 and MPC = 0.5, the tax multiplier = -1, so a balanced-budget change ΔG = ΔT yields ΔY = 2ΔG - ΔT = ΔG. To raise GDP by R100 billion you need ΔG = R100 billion (and ΔT = R100 billion).
Reason: With a spending multiplier of 2 and MPC = 0.5, the tax multiplier = -1, so a balanced-budget change ΔG = ΔT yields ΔY = 2ΔG - ΔT = ΔG. To raise GDP by R100 billion you need ΔG = R100 billion (and ΔT = R100 billion).