Question

1. According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of T will:

a. decrease equilibrium income by T.
b. decrease equilibrium income by T / (1 – MPC).
c. decrease equilibrium income by T (MPC) / (1 – MPC).
d. not affect equilibrium income at all.

Answer 1

The correct answer is option c.

Step-by-step explanation:

With an increase in the taxes the equilibrium income will decline by the amount of tax multiplier into the change in tax rates.

The tax multiplier is a measure to show the change in aggregate production due to change in tax rates.

It is calculated by the ratio of marginal propensity to consume and marginal propensity to save or 1-MPS.