Assume the MPC is .8.If government were to impose $50 billion of new taxes on household income, consumption spending would decrease by:
A)$100 billion.
B)$40 billion.
C)$90 billion
D)$50 billion.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) of 0.8 means that for every additional dollar of income, consumption increases by 80 cents. Therefore, if taxes increase by $50 billion, disposable income decreases by $50 billion, leading to a decrease in consumption spending by 0.8 * $50 billion = $40 billion.

Assume the MPC Is