Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. The tax multiplier is:
A)exactly 0.8.
B)impossible to determine.
C)greater than 5.
D)less than 5.

Name: Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. The tax multiplier is: A)exactly 0.8. B)impossible to determine. C)greater than 5. D)less than 5.
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Question

Quizplus · Accepted Answer

The tax multiplier is calculated as -MPC/(1-MPC). With MPC = 0.8, the tax multiplier is -0.8/(1-0.8) = -4, which is less than 5.

Assume That Marginal Propensity to Consume Is 0