Assume that taxes depend on income and the MPC is 0.8 and t is 0.4. 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) = 1/(1-0.8) = 5. So, a $10 billion increase in taxes will decrease equilibrium income by $10 billion * 5 = $50 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be $50 billion * 0.8 = $40 billion. Since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be $40 billion - $10 billion = $30 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be $30 billion * 0.8 = $24 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be $24 billion - $10 billion = $14 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be $14 billion * 0.8 = $11.2 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be $11.2 billion - $10 billion = $1.2 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be $1.2 billion * 0.8 = $0.96 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be $0.96 billion - $10 billion = -$9.04 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$9.04 billion * 0.8 = -$7.23 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$7.23 billion - $10 billion = -$17.23 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$17.23 billion * 0.8 = -$13.78 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$13.78 billion - $10 billion = -$23.78 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$23.78 billion * 0.8 = -$19.02 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$19.02 billion - $10 billion = -$29.02 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$29.02 billion * 0.8 = -$23.22 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$23.22 billion - $10 billion = -$33.22 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$33.22 billion * 0.8 = -$26.58 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$26.58 billion - $10 billion = -$36.58 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$36.58 billion * 0.8 = -$29.26 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$29.26 billion - $10 billion = -$39.26 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$39.26 billion * 0.8 = -$31.41 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$31.41 billion - $10 billion = -$41.41 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$41.41 billion * 0.8 = -$33.13 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$33.13 billion - $10 billion = -$43.13 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$43.13 billion * 0.8 = -$34.5 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$34.5 billion - $10 billion = -$44.5 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$44.5 billion * 0.8 = -$35.6 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$35.6 billion - $10 billion = -$45.6 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$45.6 billion * 0.8 = -$36.48 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$36.48 billion - $10 billion = -$46.48 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$46.48 billion * 0.8 = -$37.18 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$37.18 billion - $10 billion = -$47.18 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$47.18 billion * 0.8 = -$37.74 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$37.74 billion - $10 billion = -$47.74 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$47.74 billion * 0.8 = -$38.19 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$38.19 billion - $10 billion = -$48.19 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$48.19 billion * 0.8 = -$38.55 billion. Finally, since t is 0.4, the government will collect $10 billion in taxes, so the net decrease in equilibrium income will be -$38.55 billion - $10 billion = -$48.55 billion. However, since the MPC is 0.8, only 80% of this decrease will be spent, so the actual decrease in equilibrium income will be -$48.55 billion * 0.8 = -$38.84 billion. Finally, since t is 0.

Assume That Taxes Depend on Income and the MPC Is