Let Y = real GDP and Y_d = disposable income.Suppose initially, Y = Y_d and the marginal propensity to consume (MPC)
Is 0.8.All components of aggregate expenditures except consumption are autonomous.Now suppose the government imposes an income tax rate of 30% on real GDP.As a result, one additional dollar will increase consumption by

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Quizplus · Accepted Answer

With a 30% tax rate, disposable income becomes 70% of real GDP. The MPC of 0.8 applies to disposable income, so the effective MPC with the tax is 0.8 * 0.7 = 0.56. Thus, one additional dollar of GDP increases consumption by $0.56.

Let Y = Real GDP and Yd = Disposable Income

Let Y = Real GDP and Y_d = Disposable Income