Let Y = real GDP and Y_d = disposable income. Suppose initially, Y = Y_d and the marginal propensity to consume (MPC) is 0.8. All components of aggregate expenditures except consumption are autonomous. Now suppose the government imposes an income tax rate of 30% on real GDP. As a result, one additional dollar will increase consumption by A) $0.24. B) $0.30. C) $0.56. D) $0.50.

Question

Quizplus · Accepted Answer

With a 30% tax rate, disposable income (Yd) becomes 70% of real GDP (Y). The MPC is 0.8, so for every additional dollar of Y, disposable income increases by $0.70, and consumption increases by 0.8 * $0.70 = $0.56.

Let Y = Real GDP and Yd = Disposable Income

Let Y = Real GDP and Y_d = Disposable Income