Suppose that taxes collected by the government could be represented by T = 100 + 0.2Y. If the marginal propensity to consume were 0.9, then an increase in GDP of $100 would cause consumption to
A) increase by $172.
B) fall by $20.
C) increase by $72.
D) increase by $80.
E) increase by $100.

Question

Quizplus · Accepted Answer

An increase in GDP of $100 would lead to an increase in taxes collected by the government by $20 (since 0.2 * $100 = $20). This leaves $80 ($100 - $20) of the increase in GDP available for consumption and saving. Given the marginal propensity to consume (MPC) is 0.9, 90% of the remaining $80 would go towards consumption, which is $72 (0.9 * $80).

Suppose That Taxes Collected by the Government Could Be Represented