An increase in taxes will have a greater effect on the equilibrium GDP
A)if the tax revenues are redistributed through transfer payments.
B)the larger the MPS.
C)the smaller the MPC.
D)the larger the MPC.

Question

Quizplus · Accepted Answer

An increase in taxes will have a greater effect on the equilibrium GDP if the larger the MPC (marginal propensity to consume), because a larger MPC means that consumers are more likely to reduce their consumption significantly in response to a tax increase, leading to a larger decrease in GDP.

An Increase in Taxes Will Have a Greater Effect on the Equilibrium