If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, the
A) saving schedule will shift upward by $5 billion.
B) consumption schedule will shift downward by $25 billion.
C) consumption schedule will shift downward by $20 billion.
D) consumption schedule will shift upward by $25 billion.

Question

Quizplus · Accepted Answer

If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, then the MPC must be 0.80 (since MPC + MPS = 1). This means that $20 billion ($25 billion x 0.80) will be taken out of consumption, leading to a downward shift in the consumption schedule of $20 billion. Therefore, choice C is the correct answer. The saving schedule will not shift, and consumption will not increase, so choices A, B, and D are incorrect.

If a Lump-Sum Income Tax of $25 Billion Is Levied