Assume autonomous net taxes rise by $500, and the marginal propensity to consume equals 3/4.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.How will disposable income initially change?

Question

Quizplus · Accepted Answer

Autonomous net taxes are taxes that are not tied to changes in income or consumption. An increase in autonomous net taxes of $500 will directly reduce disposable income by the same amount. The marginal propensity to consume is 3/4, which means that 75% of any change in disposable income will be spent on consumption. Therefore, the decrease in disposable income of $500 will result in a reduction in consumption of $375 (3/4 of $500). The decrease in consumption will then lead to a reduction in aggregate demand and a decrease in equilibrium income.

Assume Autonomous Net Taxes Rise by $500, and the Marginal