Suppose a $100 autonomous net tax is introduced in an economy with an MPC equal to 0.7.How will this affect consumption at each level of real GDP?
A) Consumption will increase by $100.
B) Consumption will decrease by $100.
C) Consumption will increase by $70.
D) Consumption will decrease by $70.

Question

Suppose a $100 autonomous net tax is introduced in an economy with an MPC equal to 0.7.How will this affect consumption at each level of real GDP?  
A) Consumption will increase by $100. 
B) Consumption will decrease by $100. 
C) Consumption will increase by $70. 
D) Consumption will decrease by $70.

Quizplus · Accepted Answer

An autonomous net tax decreases disposable income, leading to a decrease in consumption. With an MPC of 0.7, for every $1 decrease in income, consumption decreases by $0.70. Therefore, a $100 tax decreases consumption by $70.

Suppose a $100 Autonomous Net Tax Is Introduced in an Economy