Suppose the government wants to cause equilibrium income to rise by $100 through a change in autonomous net taxes and the MPC is 0.8.By what amount should the government decrease autonomous net taxes?

Question

Quizplus · Accepted Answer

The formula for calculating the change in equilibrium income due to a change in autonomous net taxes is:
ΔY = - MPC x ΔT
where ΔY is the change in equilibrium income, MPC is the marginal propensity to consume, and ΔT is the change in autonomous net taxes.

In this case, the government wants to cause equilibrium income to rise by $100, so:

ΔY = $100

The MPC is given as 0.8, so:

MPC = 0.8

Substituting these values in the formula, we get:

$100 = - 0.8 x ΔT

Solving for ΔT, we get:

ΔT = -$125

Since the question asks for the amount by which the government should decrease autonomous net taxes, the answer is the absolute value of ΔT, which is $125. However, the answer options are in terms of the actual decrease in autonomous net taxes, so we need to choose the option that is closest to $125. The closest option is B) by $25, which is a decrease of $25 in autonomous net taxes.

Suppose the Government Wants to Cause Equilibrium Income to Rise