Assume autonomous net taxes rise by $500; the marginal propensity to consume = 0.75.Net exports,planned investment,taxes,and government purchases are autonomous and remain fixed.As a result,equilibrium real GDP demanded will
A)rise by $500
B)fall by $500
C)rise by $1,500
D)fall by $1,500
E)rise by $2,000

Question

Quizplus · Accepted Answer

The multiplier effect is calculated as 1/(1-MPC) = 1/(1-0.75) = 4. An increase in taxes by $500 will decrease consumption by $500 * 0.75 = $375 initially. The total decrease in GDP will be $375 * 4 = $1,500.

Assume Autonomous Net Taxes Rise by $500; the Marginal Propensity