Assume that taxes depend on income and the MPC is 0.6 and t is 0.3. An increase in taxes of $10 billion will decrease equilibrium income by

Question

Quizplus · Accepted Answer

The correct answer is A because the multiplier is 1/(1-MPC-t) = 1/(1-0.6-0.3) = 2.5. So, a $10 billion increase in taxes will decrease equilibrium income by $10 billion * 2.5 = $25 billion. However, since the MPC is 0.6, the decrease in consumption will be $10 billion * 0.6 = $6 billion. Therefore, the total decrease in equilibrium income will be $25 billion - $6 billion = $19 billion.

Assume That Taxes Depend on Income and the MPC Is