Assume autonomous net taxes fall by $300; the MPC = 2/3.Net exports,planned investment,taxes,and government purchases are autonomous and remain fixed.Disposable income will initially
A)remain unchanged
B)rise by $300
C)rise by $200
D)rise by $900
E)fall by $300

Question

Quizplus · Accepted Answer

Autonomous net taxes falling by $300, with a MPC of 2/3, implies an increase in disposable income of $300/(1-2/3), which is $900. However, since the question specifies that all other autonomous variables will remain constant, we must subtract the initial decrease of $300 to arrive at a final increase of disposable income of $600 ($900-$300). Therefore, the correct answer is B, rise by $300.

Assume Autonomous Net Taxes Fall by $300; the MPC =