According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ΔT will:
A)decrease equilibrium income by ΔT.
B)decrease equilibrium income by ΔT / (1 - MPC).
C)decrease equilibrium income by ΔT (MPC) / (1 - MPC).
D)not affect equilibrium income at all.

Question

Quizplus · Accepted Answer

In the Keynesian-cross model, a rise in taxes decreases disposable income, which reduces consumption by MPC times the change in taxes. This leads to a multiplied effect on equilibrium income, calculated as ΔT (MPC) / (1 - MPC).

According to the Keynesian-Cross Analysis, If MPC Stands for Marginal