Assume the MPC is 0.6. If government were to impose $20 billion of new taxes on...

Assume the MPC is 0.6. If government were to impose $20 billion of new taxes on household income, consumption spending would initially decrease by

A. $12 billion

B. $20 billion

C. $80 billion

D. $8 billion

Solutions

Expert Solution

Marginal Propensity to Consume (MPC), is the proportion of an increase in income that gets spent on consumption.

MPC = Change in Consumption / Change in disposable Income

0.6 = Change in Consumption / 20

Change in Consumption = 0.6 * 20 = $12 Billion

This means that consumption spending will initially decrease by $12 billion.

So, Option A is Correct.

With the increase in taxes on household income, the income of household will decrease. As a result the consumption spending by household will also decrease.

Rahul Sunny answered 1 year ago

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