If a lump-sum tax of $40 billion is levied at each level of income and the MPC is 0.75, then the saving schedule will shift:
A) Upward by $10 billion
B) Upward by $25 billion
C) Downward by $10 billion
D) Downward by $25 billion

Question

Quizplus · Accepted Answer

When a lump-sum tax of $40 billion is imposed at each level of income and the MPC is 0.75, it means that consumers will have $30 billion ($40 billion tax subtracted from their disposable income of $70 billion) left to spend. This will decrease their consumption expenditure, causing a downward shift in the saving schedule.

The amount of the shift can be calculated by multiplying the MPC by the lump-sum tax of $40 billion.

Shift in Saving = MPC x Lump-sum Tax 
Shift in Saving = 0.75 x $40 billion 
Shift in Saving = $30 billion

Therefore, the saving schedule will shift downward by $10 billion ($30 billion - $20 billion initial saving schedule) when a lump-sum tax of $40 billion is levied at each level of income with an MPC of 0.75.

If a Lump-Sum Tax of $40 Billion Is Levied at Each