If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause
A)a rightward shift in the investment demand schedule.
B)an $8 billion downshift in the consumption schedule.
C)a $4 billion upshift in the consumption schedule.
D)a $12 billion downshift in the consumption schedule.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 2/3, so a $12 billion increase in taxes will reduce consumption by 2/3 of $12 billion, which is $8 billion.

If the MPC Is 2/3, the Initial Impact of an Increase