Praxis II: Economics Content Knowledge Exam Prep

Answer - C - If the tax multiplier is −4 and net taxes are reduced by $200 billion, output will be $800 billion.

Key Takeaway: Always think through these problems in a logical way. If taxes go down, consumers will be more likely to spend more money, AD will increase, and overall output will increase. In this question, the tax multiplier is −4 and the net taxes are reduced by $200 billion. You can determine the change in output by applying the tax multiplier to the change in taxes: −4 (−$200 billion) = $800 billion.