In an economy with autonomous income taxes, an increase in the marginal propensity to consume is most accurately thought of as
A) a leftward shift of the IS curve.
B) an increase in the interest sensitivity of the goods market.
C) a decrease in the interest sensitivity of the goods market.
D) both a and c.
E) both a and b.

Question

Quizplus · Accepted Answer

An increase in the marginal propensity to consume (MPC) leads to a higher sensitivity of consumption to income changes, which can be interpreted as an increase in the interest sensitivity of the goods market because it affects how changes in interest rates influence aggregate demand. Additionally, it results in a leftward shift of the IS curve, as the economy requires a lower level of interest rates to achieve the same level of output, given the higher consumption at each income level.

In an Economy with Autonomous Income Taxes, an Increase in the Marginal