If the government wants to cause equilibrium income to rise by $100 through a change in autonomous net taxes and the MPC is 0.8,it should decrease autonomous net taxes by

Question

Quizplus · Accepted Answer

The relationship between MPC (marginal propensity to consume) and the multiplier (the amount by which equilibrium income changes due to a change in autonomous spending) is:
Multiplier = 1 / (1 - MPC)
So, in this case, the multiplier is:
Multiplier = 1 / (1 - 0.8) = 5
To increase equilibrium income by $100, we need to increase autonomous spending (in this case, by decreasing autonomous net taxes) by:
Change in Autonomous Spending = Change in Equilibrium Income / Multiplier
Change in Autonomous Spending = $100 / 5 = $20
But the question asks for the decrease in autonomous net taxes, not the increase in autonomous spending. Since a decrease in autonomous net taxes is equivalent to an increase in autonomous spending (since net taxes are a leakage from the circular flow of income), we need to decrease autonomous net taxes by the same amount:
Decrease in Autonomous Net Taxes = $20
So the answer is B) $25, as that is the only choice that corresponds to a decrease in autonomous net taxes of $20 (which is the amount by which we need to decrease autonomous net taxes to increase equilibrium income by $100).

If the Government Wants to Cause Equilibrium Income to Rise