If the MPC in an economy is 0.75, a $1 billion increase in taxes will ultimately reduce consumption by
A)$1 billion.
B)$0.75 billion.
C)$3 billion.
D)$4 billion.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.75, meaning that for every dollar of income, consumption increases by 75 cents. A $1 billion increase in taxes reduces disposable income by $1 billion, leading to an initial decrease in consumption of $0.75 billion. The multiplier effect further reduces consumption by $0.75 billion / (1 - 0.75) = $3 billion.

If the MPC in an Economy Is 0