Question

An economy has a zero marginal tax rate.

When real GDP​ increases, the change in consumption expenditure equals​ _______.

A.(1+ the marginal propensity to ​consume) times the increase in real GDP
B.the marginal propensity to consume divided by the increase in real GDP
C.the marginal propensity to consume times the increase in real GDP
D.the increase in real GDP divided by the marginal propensity to consume

Answer 1

When an economy has a zero marginal tax rate, the change in consumption expenditure equals (1+ the marginal propensity to consume) times the increase in real GDP. The marginal propensity to consume (MPC) is the share of additional income that people decide to devote to consumption. The higher the MPC, the greater the increase in consumption expenditure when real GDP increases.

Step-by-step explanation:

When an economy has a zero marginal tax rate, the change in consumption expenditure equals (1+ the marginal propensity to consume) times the increase in real GDP. This means that as real GDP increases, consumption expenditure will also increase by the amount multiplied by (1+ the marginal propensity to consume).

The marginal propensity to consume (MPC) is the share of additional income that people decide to devote to consumption. The MPC ranges from 0 to 1, and the higher the MPC, the greater the increase in consumption expenditure when real GDP increases.

For example, let's say the marginal propensity to consume is 0.8 and real GDP increases by $100. The change in consumption expenditure would be (1+0.8) times $100, which is $180.