In a country without foreign trade and no income taxes,if the government increases autonomous taxes by 1000 and the MPS is 0.1,then the initial or first round change in expenditures by all tax payers will be

Question

Quizplus · Accepted Answer

In this scenario, when the government increases autonomous taxes by 1000, the overall disposable income of taxpayers will decrease. The marginal propensity to save (MPS) is given as 0.1, which means that for every additional dollar of disposable income, taxpayers will save 0.1 dollar and spend the remaining 0.9 dollar. Therefore, the initial change in expenditures by all taxpayers will be a reduction equal to 900 (0.9*1000). Therefore, the correct choice is C.

In a Country Without Foreign Trade and No Income Taxes,if