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 0 1
Is 5,000. If t decreases from 0.3 to 0.2, then consumption 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 disposable income (Y - T) increases, leading to an increase in consumption. The change in taxes is 0.1 * 5000 = 500. The marginal propensity to consume is 0.85, so the increase in consumption is 0.85 * 500 = 425.

Assume That the Consumption Function Is Given by C =