If the MPC is 0.6 and the tax rate is 20%,a $200 decrease in autonomous net exports will decrease equilibrium income by
A) $384.
B) $416.
C) $478.
D) $1666.

Question

Quizplus · Accepted Answer

The correct answer is A.The multiplier is 1/(1-MPC) = 1/(1-0.6) = 2.5. So, a $200 decrease in autonomous net exports will decrease equilibrium income by 2.5 * $200 = $500. However, we need to take into account the tax rate of 20%. This means that the government will collect $200 * 0.2 = $40 in taxes. So, the actual decrease in equilibrium income will be $500 - $40 = $460.

If the MPC Is 0