The effect of a change in net taxes on the quantity of real GDP demanded equals the resulting shift in the consumption function times _____.
A)the marginal propensity to consume
B)the marginal propensity to save
C)the autonomous net tax multiplier
D)the simple spending multiplier
E)the marginal tax rate

Question

Quizplus · Accepted Answer

The effect of a change in net taxes on the quantity of real GDP demanded is determined by the simple spending multiplier, which is the change in equilibrium GDP divided by the change in net taxes. The simple spending multiplier is equal to 1/(1-MPC) where MPC is the marginal propensity to consume. Therefore, the effect of a change in net taxes equals the resulting shift in the consumption function times the simple spending multiplier.

The Effect of a Change in Net Taxes on the Quantity