Question

Suppose during 2020due to relief in Taxation Marginal Propensity to Consume (MPC) will increase from 0.65 to 0.75then calculate Tax multiplier (KT).

Answer 1

`K_T = -3`

Step-by-step explanation:

Given

`MPC_1 = 0.65`

`MPC_2 = 0.75`

Required

Determine the Tax Multiplier (KT)

KT is calculated as follows;

`K_T = (-MPC)/(1 - MPC)`

Substitute 0.75 for MPC because MPC has changed from 0.65 to 0.75

`K_T = -(0.75)/(1 - 0.75)`

Evaluate the denominator

`K_T = -(0.75)/(0.25)`

Divide fractions

`K_T = -3`

Hence, the tax multiplier is -3