Question

Assume the marginal propensity to consume is 0.8 and taxes are cut by 12 billion. What will be the change in consumption?

Answer 1

The change in consumption will be $9.6 billion.

Step-by-step explanation:

To calculate the change in consumption, we need to multiply the change in after-tax income by the marginal propensity to consume (MPC). In this case, the tax cut is $12 billion, so the change in after-tax income is also $12 billion. With an MPC of 0.8, the change in consumption would be $12 billion multiplied by 0.8, which equals $9.6 billion.