An increase in taxes will have a greater effect on equilibrium output:
A)if the tax revenues are redistributed through transfer payments
B)the larger the MPW
C)the smaller the MPC
D)the larger the MPC
E)if the aggregate supply curve is vertical

Question

Quizplus · Accepted Answer

The larger the MPC (marginal propensity to consume), the more sensitive individuals are to changes in income. Therefore, if taxes increase and income decreases, individuals with a higher MPC will reduce their consumption more, leading to a larger decrease in equilibrium output.

An Increase in Taxes Will Have a Greater Effect on Equilibrium