If the consumption function is given by C = 100 + 0.75(Y-T),then an increase of 10 units in taxes will cause the IS schedule to shift to the right by
A)-30 units.
B)-10 units.
C)30 units.
D)40 units.

Question

Quizplus · Accepted Answer

An increase in taxes (T) by 10 units would decrease disposable income (Y-T) by 10 units. Given the marginal propensity to consume (MPC) is 0.75, consumption (C) would decrease by 0.75 * 10 = 7.5 units. However, the IS curve represents equilibrium in the goods market, where investment equals savings. A decrease in consumption due to higher taxes would reduce aggregate demand, shifting the IS curve to the left, not the right. The options provided do not directly correlate to the standard IS curve shift due to a tax increase in terms of units. The closest option, given the misunderstanding in the question's phrasing about the direction of the shift, is -30 units, assuming a misinterpretation of the impact magnitude.

If the Consumption Function Is Given by C = 100