Which of the following is a correct statement of the impacts of a lump-sum tax?
A) Disposable income will increase by the amount of the tax and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC.
B) Disposable income will decline by the amount of the tax and consumption at each level of GDP will decline by the amount of the tax multiplied by the multiplier.
C) Disposable income will decline by the amount of the tax and consumption at each level of GDP will also decline by the amount of the tax.
D) Disposable income will decline by the amount of the tax and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC.

Question

Quizplus · Accepted Answer

A lump-sum tax is a fixed amount of tax that doesn't depend on the level of income or consumption. Therefore, it directly reduces disposable income by the amount of the tax. As a result, consumption at each level of GDP will decline by the amount of the tax multiplied by the marginal propensity to consume (MPC), which measures the fraction of additional income that is consumed. Thus, option D is the correct statement.

Which of the Following Is a Correct Statement of the Impacts