Assume the MPC is 0.8. If government were to impose $50 billion of new taxes on household income, consumption spending would initially decrease by
A) $100 billion.
B) $90 billion.
C) $40 billion.
D) $50 billion.

Question

Quizplus · Accepted Answer

The initial decrease in consumption spending would be the amount of the new taxes ($50 billion) multiplied by the marginal propensity to consume (MPC), which is 0.8. Therefore, the decrease in consumption spending would be $50 billion * 0.8 = $40 billion.

Assume the MPC Is 0