Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t
+ t Y, and Y is 5,000. If t
Decreases from 0.3 to 0.2, then consumption
0 1
Increases by:
1
A)85.
B)425.
C)500.
D)525.

Question

Quizplus · Accepted Answer

When t decreases from 0.3 to 0.2, the tax function T changes, leading to an increase in disposable income (Y - T). The increase in disposable income is 500 (0.1 * 5000), and with a marginal propensity to consume of 0.85, consumption increases by 0.85 * 500 = 425.

Assume That the Consumption Function Is Given by C =