The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving:

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Since output does not change, the lump-sum tax increase is not affecting investment. Using the equation Y = C + I + G + NX, where NX is assumed to be constant, we can see that if output (Y) stays constant, then consumption (C) must also stay constant. Given the marginal propensity to consume of 0.6, this means that for every $1 increase in income, consumption will increase by $0.60. Therefore, out of the $100 billion tax increase, only $40 billion (0.6*$100 billion) will be taken out of consumption. The remaining $60 billion will be saved, so national saving will rise by $60 billion.

The Government Raises Lump-Sum Taxes on Income by $100 Billion