If government reduces taxes by $10 billion and the MPC is equal to 0.8, the spending is expected to increase by:
A) $0.8 billion.
B) $5 billion.
C) $8 billion.
D) $10 billion.

Question

Quizplus · Accepted Answer

The MPC (Marginal Propensity to Consume) is the fraction of any change in income that households plan to spend. Here, the MPC is given as 0.8 which means that for every additional dollar of income, households are likely to spend 80 cents.

Therefore, when the government reduces taxes by $10 billion, the additional income available to households is $10 billion, and they are likely to spend 80% of this additional income, which is $8 billion. Hence, the spending is expected to increase by $8 billion.

If Government Reduces Taxes by $10 Billion and the MPC