When taxes are reduced, disposable income _____ and consumption spending _____ by the marginal propensity to consume multiplied by the change in disposable income.
A) rises; rises
B) falls; falls
C) rises; falls
D) falls; rises

Question

Quizplus · Accepted Answer

When taxes are reduced, disposable income rises. With more disposable income, consumers tend to spend more, but the amount of the increase in consumption spending is determined by the marginal propensity to consume. The higher the marginal propensity to consume, the larger the increase in consumption spending will be.

When Taxes Are Reduced, Disposable Income _____ and Consumption Spending