Question

An economy is experiencing a high rate of inflation. The government wants to reduceconsumption by $36 billion to reduce inflationary pressure. The MPC is .75. By how much should thegovernment raise taxes to achieve its objective?A. $6 billionB. $9 billionC. $12 billionD. $16 billion

Answer 1

Answer:

$12 billion

Explanation:

Data provided in the question:

Required reduction in the consumption = $36 billion

MPC = 0.75

Now,

Total income = [ Required reduction in the consumption ] ÷ MPC

= [ $36 billion ] ÷ 0.75

= $48 billion

Therefore,

The raise in tax = Total income - Required reduction in the consumption

= $48 billion - $36 billion

= $12 billion