Assume that the marginal propensity to save is 0.2. If we consider the multiplier effect and hold all the other factors, a $200 billion income tax cut can increase the real GDP totally in the long run by
a. $40 billion
b. $250 billion
c. $800 billion
d. $1 Trillion
Answer: c. $800 billion
Change in real GDP = MPC /(1-MPC) * change in income tax cut
= 0.8/0.2 * 200 = 800
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