If a lump-sum tax of $40 billion is imposed and the MPC is 0.6, the saving schedule will shift
A)downward by $24 billion.
B)upward by $24 billion.
C)downward by $16 billion.
D)upward by $16 billion.

Question

Quizplus · Accepted Answer

The change in savings is determined by the marginal propensity to save (MPS), which is 1 - MPC. Here, MPS is 0.4. The tax reduces disposable income by $40 billion, so savings decrease by 0.4 * $40 billion = $16 billion.

If a Lump-Sum Tax of $40 Billion Is Imposed and the MPC