In 1963, government economists assumed that the MPC for the United States was approximately 0.90.If taxes were cut by $9 billion, then consumer expenditures would initially be expected to
A)decrease by $9.0 billion.
B)increase by $9.0 billion.
C)decrease by $8.1 billion.
D)increase by $8.1 billion.

Question

Quizplus · Accepted Answer

If the MPC (marginal propensity to consume) is 0.90, it means that for every additional dollar of disposable income, consumers will spend 90 cents and save 10 cents. Therefore, if taxes are cut by $9 billion, consumers will have an extra $9 billion of disposable income.

The initial increase in consumer spending will be equal to the MPC multiplied by the tax cut, which is:

0.90 x $9 billion = $8.1 billion

Therefore, the correct answer is (D) increase by $8.1 billion.

In 1963, Government Economists Assumed That the MPC for the United