Assume that C = 150 + 0.9Y and I = 50. The tax multiplier is:

Question

Quizplus · Accepted Answer

The tax multiplier formula is -MPC/MPS, where MPC is the marginal propensity to consume and MPS is the marginal propensity to save. To find MPC, we can take the derivative of the consumption function with respect to income: MPC = dC/dY = 0.9. We can assume that the entire tax revenue is being used to decrease government spending, which means that MPS is equal to 1 since all the money not spent by consumers will be saved by the government. Therefore, the tax multiplier is -0.9/1 = -9.

Assume That C = 150 + 0