If the MPC for an economy is 0.90,a $4 billion increase in taxes will ultimately cause consumption to decrease by

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.90, meaning for every dollar increase in disposable income, consumption increases by 90 cents. A $4 billion increase in taxes reduces disposable income by $4 billion, leading to a decrease in consumption. The multiplier effect is 1/(1-MPC) = 1/(1-0.90) = 10. Therefore, the decrease in consumption is $4 billion * 10 = $40 billion. However, since taxes directly remove money from the economy rather than being a direct decrease in consumption, the immediate effect is the tax amount times the MPC, which is $4 billion * 0.90 = $3.6 billion. The initial interpretation was incorrect; the correct immediate decrease in consumption due to the tax increase, considering the MPC directly, is $3.6 billion, not the multiplied effect of $40 billion.

If the MPC for an Economy Is 0