Assume autonomous net taxes rise by $400, and the marginal propensity to consume equals 3/4.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.As a result, how will saving initially change?

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) equals 3/4, which means that for every additional dollar of disposable income, consumers will spend 75 cents of it and save 25 cents.

With autonomous net taxes rising by $400, disposable income decreases by $400 (assuming no change in GDP) since taxes are an outflow.

The change in saving equals the change in disposable income times the MPC, which is: 
∆S = ∆Yd x MPC 
∆S = -$400 x 3/4 
∆S = -$300

Therefore, saving will fall by $100 ($300 decrease in saving – $400 decrease in disposable income from higher taxes).

Assume Autonomous Net Taxes Rise by $400, and the Marginal