Suppose the marginal propensity to consume is equal to 0.75.If the government lowers tax rates and tax revenue falls by $100 million,then disposable income will increase by________ million and consumption spending will initially increase by ________ million.

Question

Quizplus · Accepted Answer

When tax revenue falls by $100 million, disposable income increases by the same amount, $100 million. With a marginal propensity to consume of 0.75, consumption spending will initially increase by 0.75 * $100 million = $75 million.

Suppose the Marginal Propensity to Consume Is Equal to 0