If the marginal propensity to consume is 0.1, then the tax multiplier is:
A)exactly 0.1.
B)more than 10.
C)less than 10.
D)exactly 10.

Question

Quizplus · Accepted Answer

The tax multiplier is equal to -MPC/ (1-MPC). In this case, MPC is 0.1, so the tax multiplier is -0.1/(1-0.1) = -0.111. This means that a $1 increase in taxes will lead to a decrease in aggregate demand of $0.11, which is less than 10. Therefore, the best choice is C, less than 10.

If the Marginal Propensity to Consume Is 0