Question

Assume the marginal propensity to consume (mpc) is 0.80 and the government increases taxes by $100 billion. the aggregate demand curve will shift to the:________

Answer 1

The change in GDP that results from an increase in taxation is known as the tax multiplier. When the government raises taxes and MPC is $0.8$, the tax multiplier also rises, which causes the aggregate demand to move to the left. However, this choice is flawed because the tax multiplier is $$400$billion.

Tax multiplier: MPC1 MPC=$0.80 MPC=0.80 MPC=100 = 400 billion$

The selection is in error. The increase in taxes would reduce consumers' disposable income and cause a decline in spending. As a result, aggregate demand will decrease and move $$400$billion to the left. The assertion is untrue. The aggregate demand would decline initially as a result of a tax rise and later on due to a change in disposable income. Although.

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