If the MPC in an economy is .75,a $1 billion increase in taxes will ultimately reduce consumption by:
A) $1 billion.
B) $0.75 billion.
C) $3 billion.
D) $4 billion.

Question

Quizplus · Accepted Answer

The marginal propensity to consume (MPC) is 0.75, meaning that for every dollar of income, consumption increases by 75 cents. A $1 billion tax increase reduces disposable income by $1 billion, leading to an initial reduction in consumption of $0.75 billion. The multiplier effect further reduces consumption, calculated as 1/(1-MPC) = 4. Thus, the total reduction in consumption is $0.75 billion * 4 = $3 billion.

If the MPC in an Economy Is