Suppose the marginal propensity to consume is 0.75.If government purchases increase by $100 billion and the extra expenditure is financed with a net tax of $100 billion,by how much will output change?

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.75, which means that for every $1 increase in income, people will spend $0.75 and save $0.25. In this scenario, the increase in government purchases of $100 billion will lead to an increase in income and output by the same amount, $100 billion. The net tax of $100 billion will decrease disposable income by the same amount, but since the MPC is 0.75, people will only consume $75 billion of that and save $25 billion. Therefore, the increase in output will be $100 billion ($75 billion increase in consumption and $25 billion increase in savings).

Suppose the Marginal Propensity to Consume Is 0