Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t₀ + t₁Y, and Y is 5,000. If t₁ decreases from 0.3 to 0.2, then consumption increases by: A)85. B)425. C)500. D)525.

Question

Quizplus · Accepted Answer

When t₁ decreases from 0.3 to 0.2, the tax amount decreases, increasing disposable income (Y - T). The change in tax is 0.1 * 5000 = 500. The increase in consumption is 0.85 * 500 = 425.

Assume That the Consumption Function Is Given by C =