Assume autonomous net taxes fall by $300; the MPC = 2/3.Net exports,planned investment,taxes,and government purchases are autonomous and remain fixed.The value of the spending multiplier equals
A)1
B)10
C)3
D)0
E)an indeterminate value

Question

Quizplus · Accepted Answer

The spending multiplier equals 1/(1-MPC). Since the MPC is 2/3, the spending multiplier equals 1/(1-2/3) = 3. Therefore, a decrease in autonomous net taxes of $300 will lead to an increase in aggregate demand (via an increase in disposable income) of $300 x 3 = $900.

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