If the government cut taxes by $200,and the GDP increased $1,800 as a result,the MPC must be:

Question

Quizplus · Accepted Answer

The MPC (marginal propensity to consume) is the increase in consumer spending when disposable income increases by $1. In this case, the government cut taxes by $200, which increases disposable income by $200. The GDP increased by $1,800 as a result of this tax cut. We can use the equation:
change in GDP = (change in spending) / MPC
where the change in spending is equal to the tax cut of $200. Thus,
$1,800 = $200 / MPC
Solving for MPC, we get MPC = 0.90. Therefore, the best choice is A) 0.90.

If the Government Cut Taxes by $200,and the GDP Increased