To predict the effects of a tax cut on consumption spending, economists must have some estimate of the
A)income effect.
B)substitution effect.
C)relative price effect.
D)marginal propensity to consume.

Question

Quizplus · Accepted Answer

The best choice is the marginal propensity to consume (MPC), which is the percentage of a change in income that is spent on consumption. If the tax cut leads to an increase in disposable income, households may spend some of it rather than save it. The MPC will determine how much of the tax cut is spent on consumption, and therefore will help economists predict the effects of the tax cut on consumption spending. While the income effect, substitution effect, and relative price effect are all important concepts in economics, they are not as directly relevant to predicting the effects of a tax cut on consumption spending.

To Predict the Effects of a Tax Cut on Consumption