Question

Answer the following questions about the tax multiplier: Instructions: In parts a and b, round your answer to 2 decimal places. In part c, enter your answers as a whole number. If you are entering a negative number include a minus sign. a. Suppose the marginal propensity to consume (MPC) for a nation is 0.9. What is the tax multiplier for this nation

Answer 1

The tax multiplier for a nation with a marginal propensity to consume of 0.9 is -9, indicating a decrease in aggregate demand by nine units for each unit increase in taxes.

Step-by-step explanation:

The concept in question relates to the tax multiplier, which operates within the field of macroeconomics and fiscal policy. The marginal propensity to consume (MPC) is a crucial variable for calculating the tax multiplier. To find the tax multiplier when the MPC is 0.9, we use the formula tax multiplier = -MPC / (1 - MPC). Substituting the given MPC value into the formula yields:

Tax Multiplier = -0.9 / (1 - 0.9) = -0.9 / 0.1 = -9.

Hence, the tax multiplier for a nation with an MPC of 0.9 is -9. This result suggests that an increase of one unit in taxes would lead to a decrease in aggregate demand by nine units.

Answer 2

Answer: -9

Step-by-step explanation:

The Tax multiplier of a nation shows how much the aggregate demand of an economy will change if there is a change in taxes.

It is calculated by the formula:

= -MPC / ( 1 - MPC)

= -0.9 / (1 - 0.9)

= -9

If taxes are reduced, aggregate demand would increase by 9 times.