A change in taxes of a given amount shifts the consumption function vertically by ____ than that amount, because the marginal propensity to consume is ____.
A)less; less than 1
B)greater; greater than 1
C)greater; always equal to 1.
D)less; equal to zero.

Question

A change in taxes of a given amount shifts the consumption function vertically by ____ than that amount, because the marginal propensity to consume is ____.
A)​less; less than 1
B)​greater; greater than 1
C)​greater; always equal to 1.
D)​less; equal to zero.

Quizplus · Accepted Answer

A change in taxes of a given amount shifts the consumption function vertically by less than that amount because the marginal propensity to consume is less than 1. This means that consumers will not spend all of the additional income gained from a tax cut, and will instead save some of it. Therefore, the increase in consumption will be less than the amount of the tax cut.

A Change in Taxes of a Given Amount Shifts the Consumption