### Goodsmarket: By how much should taxes decrease to reach full employment

By how much taxes must decrease depends on the output gap, the multiplier and the marginal propensity to consume. If the output gap is 1000 and the multiplier is 5 then autonomous spending must increase by 1000/5 = 200. To get this increase through a decrease in taxes c(T) must be equal to 200. Given that c = 0.8 it follows that the decrease in T must be 200/0.8 = 250. The impact of a change in taxation on output and income is indirect via the consumption function.

Length:
03:42