In our simple macro model with government,which statement correctly describes the following equation: YD = (0.75)Y?
A)If disposable income increases by $0.75,then national income increases by $1.00 and total tax revenue rises by $0.75.
B)Net tax revenue is equal to 75% of national income.
C)If national income increases by $1.00,then disposable income increases by $0.75 and net tax revenue increases by $0.25.
D)Net tax revenue is equal to 25% of disposable income.
E)If national income increases by $1.00,then disposable income increases by $0.25 and net tax revenue increases by $0.75.

Question

Quizplus · Accepted Answer

The equation YD = (0.75)Y represents the relationship between disposable income (YD) and national income (Y) in the economy with a tax rate of 25%. If national income increases by $1.00, disposable income will increase by 0.75 (75% of $1.00) because taxes reduce income by 25%. Therefore, net tax revenue will increase by the difference between the increase in national income and the increase in disposable income, which is $0.25. Option A is incorrect because it suggests that national income increases by $1.00 for every $0.75 increase in disposable income, which is not accurate. Option B and D are incorrect because they provide information on net tax revenue, but not on disposable income. Option E is incorrect because it suggests that disposable income only increases by $0.25 for every $1.00 increase in national income, while the actual relationship is the opposite.

In Our Simple Macro Model with Government,which Statement Correctly Describes