If the MPC is 0.6,then a 50-unit rise in taxes and a 50-unit rise in government spending will shift the IS curve

Question

Quizplus · Accepted Answer

With an MPC of 0.6, the multiplier will be 1/(1-MPC) = 2.5. Therefore, a 50-unit rise in taxes will lead to a fall in consumption spending of 0.6*50 = 30 units. This, in turn, will lead to a fall in aggregate demand by 30*2.5 = 75 units. On the other hand, a 50-unit rise in government spending will directly increase aggregate demand by 50*2.5 = 125 units. The net effect of the two policies will be an increase in aggregate demand by 50 units (125-75). This will shift the IS curve to the right by 50 units.

If the MPC Is 0