In 1963, government economists assumed that the MPC for the United States was approximately 0.90. If
taxes were cut by $9 billion, then consumer expenditures would be expected to
a.decrease by $90 billion.
b.increase by $90 billion.
c.decrease by $81 billion.
d.increase by $81 billion.
note: why isn't it increased by 90 billion??
Answer
Option d
Tax multiplier =-MPC/(1-MPC)
=-0.9/(1-0.9)
=-9
change in consumer expenditure =change in tax * multiplier
=(-9)*9 ......... the minus sign shows tax cut.
=$81 billion
the consumer expenditures would be expected to increase by $81 billion
In 1963, government economists assumed that the MPC for the United States was approximately 0.90. If...