Suppose a $100 autonomous net tax is introduced in an economy with an MPC equal to 0.8.How will this affect equilibrium real GDP demanded at each level of real GDP?
A) The equilibrium real GDP demanded will increase by $100.
B) The equilibrium real GDP demanded will increase by more than $100.
C) The equilibrium real GDP demanded will decrease by less than $100.
D) The equilibrium real GDP demanded will decrease by more than $100.

Question

Suppose a $100 autonomous net tax is introduced in an economy with an MPC equal to 0.8.How will this affect equilibrium real GDP demanded at each level of real GDP?  
A) The equilibrium real GDP demanded will increase by $100. 
B) The equilibrium real GDP demanded will increase by more than $100. 
C) The equilibrium real GDP demanded will decrease by less than $100. 
D) The equilibrium real GDP demanded will decrease by more than $100.

Quizplus · Accepted Answer

The introduction of a $100 autonomous net tax reduces disposable income, leading to a decrease in consumption given the MPC of 0.8. This decrease in consumption will lead to a multiplier effect on the economy, reducing the equilibrium real GDP demanded by more than the initial $100 tax increase due to the spending cycle continuing beyond the initial reduction in consumption.

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