Question

Suppose the marginal propensity to consume (MPC) is 0.75 , and the government votes to increase taxes by $1.5 billion . Calculate the tax multiplier.

Answer 1

-3

Step-by-step explanation:

The computation of the tax multiplier is shown below:

Multiplier = MPC ÷ (1 - MPC)

where,

MPC = Marginal propensity to consume = -0.75

1 - MPC = 1 - marginal propensity to consume = 1 - 0.75 = 0.25

Now placing these values to the above formula

So, the tax multiplier is

= -0.75 ÷ 0.25

= -3

We simply applied the above formula of the multiplier and the same is to be considered to determine the tax multiplier