Suppose autonomous net taxes increase by $200 billion and the MPC equals 0.75.By what amount will equilibrium income decrease?
A) by $150 billion
B) by $200 billion
C) by $267 billion
D) by $600 billion

Question

Suppose autonomous net taxes increase by $200 billion and the MPC equals 0.75.By what amount will equilibrium income decrease?  
A) by $150 billion 
B) by $200 billion 
C) by $267 billion 
D) by $600 billion

Quizplus · Accepted Answer

The tax multiplier is given by -MPC/(1-MPC). With an MPC of 0.75, the tax multiplier is -0.75/(1-0.75) = -3. Therefore, an increase in taxes by $200 billion will decrease equilibrium income by 200 * 3 = $600 billion.

Suppose Autonomous Net Taxes Increase by $200 Billion and the MPC