Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.As a result, how will saving initially change?
A) It will fall by $100.
B) It will rise by $100.
C) It will fall by $300.
D) It will rise by $300

Question

Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.As a result, how will saving initially change?  
A) It will fall by $100. 
B) It will rise by $100. 
C) It will fall by $300. 
D) It will rise by $300

Quizplus · Accepted Answer

The MPC (Marginal Propensity to Consume) is 2/3, which means that for every $1 decrease in net taxes, consumption expenditure will increase by $2/3. Therefore, aggregate demand will increase by $200 ($300 x 2/3). As a result, savings will initially increase by $100 ($200 - $100 due to the fall in net taxes) according to the income-expenditure model.

Assume Autonomous Net Taxes Fall by $300, and the MPC