According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of $\Delta$T will:
A) decrease equilibrium income by $\Delta$T.
B) decrease equilibrium income by $\Delta$T/(1 - MPC).
C) decrease equilibrium income by ($\Delta$T)(MPC)/(1 - MPC).
D) not affect equilibrium income at all.

Question

Quizplus · Accepted Answer

According to the Keynesian-cross analysis, a rise in taxes decreases disposable income, which in turn reduces consumption. Since the marginal propensity to consume (MPC) is the fraction of additional income that is consumed, the decrease in equilibrium income due to a tax increase is given by the tax increase multiplied by the MPC, divided by (1 - MPC). This accounts for the multiplier effect of the initial decrease in consumption on the overall economy.

According to the Keynesian-Cross Analysis, If MPC Stands for Marginal Δ\DeltaΔ

According to the Keynesian-Cross Analysis, If MPC Stands for Marginal $\Delta$