If the marginal propensity to consume were 0.9 and a constant 20 percent tax were applied to all income, then an increase in income of $10 would cause consumption expenditure to climb by
A) 72 percent.
B) $0.72.
C) $7.20.
D) $9.00.
E) $8.00.

Question

Quizplus · Accepted Answer

With a marginal propensity to consume (MPC) of 0.9, for every dollar of income, consumption increases by 90 cents. If there's a 20% tax on all income, only 80% of any income increase is available to spend. So, an increase in income of $10, after a 20% tax, leaves $8. Of this, 90% (MPC) is spent, which equals $7.20.

If the Marginal Propensity to Consume Were 0