If government increases lump-sum taxes by $20 billion and the economy's MPC is .6, then the:
A)consumption schedule will shift upward by $12 billion.
B)consumption schedule will shift downward by $12 billion.
C)equilibrium GDP will increase by $40 billion.
D)equilibrium GDP will decrease by $12 billion.

Question

Quizplus · Accepted Answer

The decrease in consumption due to the increase in taxes is calculated by multiplying the tax increase by the MPC (0.6). Thus, $20 billion * 0.6 = $12 billion, leading to a downward shift in the consumption schedule by $12 billion.

If Government Increases Lump-Sum Taxes by $20 Billion and the Economy's