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

Answer:

$K_T = -3$

Explanation:

Given

$MPC_1 = 0.65$

$MPC_2 = 0.75$

Required

Determine the Tax Multiplier (KT)

KT is calculated as follows;

$K_T = \frac{-MPC}{1 - MPC}$

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

$K_T = -\frac{0.75}{1 - 0.75}$

Evaluate the denominator

$K_T = -\frac{0.75}{0.25}$

Divide fractions

$K_T = -3$

Hence, the tax multiplier is -3