Use the following Situation to answer the question : situation 20-2 Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals 0.9.
-Using the information in Situation 20-2,if taxes increase by $10,then the equilibrium aggregate output will change by
A)-$90.
B)-$10.
C)$10.
D)$90.

Question

Quizplus · Accepted Answer

In a closed economy with a marginal propensity to consume (mpc) of 0.9, a $10 increase in taxes reduces disposable income, leading to a decrease in consumption. The multiplier is 1/(1-mpc) = 1/(1-0.9) = 10. Therefore, a $10 increase in taxes leads to a $10 * 10 = $100 decrease in aggregate output. However, since the question asks for the change due to the increase in taxes alone, considering the initial tax increase of $10, the net change in output is $90 less than it would have been without the tax increase, hence a decrease of $90.

Use the Following Situation to Answer the Question : Situation