Question

Suppose the marginal propensity to consume is equal to 0.75. If the government lowers tax rates and tax revenue falls by $100 million, then disposable income will increase by________ million and consumption spending will initially increase by ________ million.

Answer 1

$100; $75

Step-by-step explanation:

Given that:

• Tax revenue falls by 100 million dollars
• marginal propensity to consume (MPC) is 0.75.

Due to the fall in tax revenue, disposable income will increase by the same amount, that is, $100 million.

Consuption spending will initially increase by $75 million, as shown below:

= MPC × tax revenue fall

= 0.75 × $100,000,000 = $75,000,000