If the marginal propensity to consume is 0.9, then the tax multiplier will be:
A)impossible to determine.
B)greater than 10.
C)less than 10.
D)zero, because there is no multiplier effect from taxes.

Question

Quizplus · Accepted Answer

The tax multiplier is calculated as - MPC / (1 - MPC). With a MPC of 0.9, we can plug in the value and get -0.9 / (1 - 0.9) = -9. This means that for every $1 decrease in government spending, output will decrease by $9. Since the tax multiplier is negative, it indicates that taxes have a contractionary effect on the economy.

If the Marginal Propensity to Consume Is 0