Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t₀ + t₁Y. If t₀ increases by 1 unit, then consumption: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units.

Question

Quizplus · Accepted Answer

From the tax function, we can see that an increase in t₀ will lead to an increase in T, which in turn will lead to a decrease in disposable income (Y - T) available for consumption. Since the consumption function has a positive coefficient for (Y - T), an increase in the tax rate will result in a decrease in consumption. Specifically, from the consumption function, we can see that the coefficient for (Y - T) is 0.85. Therefore, an increase in t₀ by 1 unit will lead to a decrease in consumption by 0.85 units.

Assume That the Consumption Function Is Given by C =