Suppose the consumption function equaled C = 2 + .7(Y - T).If taxes increased by $10 billion,the expenditure line would shift

Question

Quizplus · Accepted Answer

The consumption function shows that consumption (C) is a function of disposable income (Y - T). If taxes (T) increase by $10 billion, disposable income decreases by $10 billion. The marginal propensity to consume (MPC) is 0.7, so consumption decreases by 0.7 * $10 billion = $7 billion. Thus, the expenditure line shifts down by $7 billion.

Suppose the Consumption Function Equaled C = 2