If a lump-sum tax of $40 billion is imposed and the MPC is 0.6, the saving schedule will:
A)shift downward by $24 billion.
B)shift upward by $24 billion.
C)shift downward by $16 billion.
D)shift upward by $16 billion.

Question

Quizplus · Accepted Answer

MPC (Marginal Propensity to Consume) = 0.6 implies that for every extra dollar of income, individuals will consume 60 cents and save 40 cents.

The lump-sum tax of $40 billion reduces the disposable income of individuals, which will result in a decrease in consumption and an increase in savings. The change in savings will be equal to the MPC multiplied by the change in the disposable income.

Change in Disposable Income= -$40 billion (since tax is imposed on income)

Change in Savings = MPC x Change in Disposable Income
                      = 0.6 x (-$40 billion)
                      = -$24 billion

Therefore, the saving schedule will shift downward by $16 billion (option C).

If a Lump-Sum Tax of $40 Billion Is Imposed and the MPC