Let Y = real GDP and Y_d = disposable income.Suppose initially, Y = Y_d and the marginal propensity to consume (MPC)
Is 0.9.All components of aggregate expenditures except consumption are autonomous.Now suppose the government imposes an income tax rate of 20% on real GDP.What is the marginal propensity to consume following the imposition of an income tax?

Question

Quizplus · Accepted Answer

The marginal propensity to consume out of disposable income is 0.9. With a 20% tax, disposable income is 80% of GDP, so the MPC out of GDP becomes 0.9 * 0.8 = 0.72.

Let Y = Real GDP and Yd = Disposable Income

Let Y = Real GDP and Y_d = Disposable Income