Assume taxes increase by $200 and the marginal propensity to consume is 0.75. Equilibrium income would be likely to

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Quizplus · Accepted Answer

The decrease in disposable income due to the tax increase leads to a reduction in consumption. With a marginal propensity to consume of 0.75, for every dollar decrease in income, consumption decreases by 75 cents. Thus, a $200 tax increase reduces consumption by $150 ($200 * 0.75). In a simple multiplier model, the reduction in consumption is amplified through the economy. The multiplier is 1/(1-MPC) = 1/(1-0.75) = 4. Therefore, the total reduction in equilibrium income is $150 * 4 = $600.

Assume Taxes Increase by $200 and the Marginal Propensity to Consume