Assume the marginal propensity to consume is 0.8. How will a decrease in taxes of $100 billion and a decrease in government spending of $100 billion affect aggregate demand?ResponsesAggregate demand will decrease by $900 billion.Aggregate demand will decrease by $900 billion.Aggregate demand will decrease by $500 billion.Aggregate demand will decrease by $500 billion.Aggregate demand will decrease by $400 billion.Aggregate demand will decrease by $400 billion.Aggregate demand will decrease by $100 billion.Aggregate demand will decrease by $100 billion.Aggregate demand will not change.
Question
Assume the marginal propensity to consume is 0.8. How will a decrease in taxes of 100 billion affect aggregate demand?ResponsesAggregate demand will decrease by 900 billion.Aggregate demand will decrease by 500 billion.Aggregate demand will decrease by 400 billion.Aggregate demand will decrease by 100 billion.Aggregate demand will not change.
Solution
The marginal propensity to consume (MPC) is the increase in consumer spending due to an increase in income. If the MPC is 0.8, this means that for every additional dollar of income, consumers will spend 80 cents and save 20 cents.
When taxes decrease by 100 billion. According to the MPC, consumers will spend 80% of this additional income, or 80 billion.
However, a decrease in government spending of 100 billion.
So, the net effect on aggregate demand is the increase due to the tax cut (100 billion), which equals -$20 billion.
Therefore, none of the provided responses are correct. The correct response would be "Aggregate demand will decrease by $20 billion."
Similar Questions
Suppose that the marginal propensity to consume is 0.8 and that taxes increase by $100. In this case, income will:increase by $500.increase by $400.decrease by $80.decrease by $400.
Suppose every household decreases its consumption by 10% and consumption is roughly 70% of total output. A 10% decrease in consumption represents a 7% decrease in output. Aggregate demand will:Multiple choice question.decrease by less than 7% because of the expenditures multiplier.decrease by 7% because consumption is the largest component of aggregate demand.increase eventually because of the expenditures multiplier.decrease by more than 7% because of the expenditures multiplier.
Based on the above figure, how does a decrease in government spending affect the aggregate expenditure line? a. It shifts the aggregate expenditure line downward. b. It shifts the aggregate expenditure line upward. c. It decreases the slope of the aggregate expenditure line. d. It increases the slope of the aggregate expenditure line.
What are the effects of a change in taxes on consumption and aggregate demand?Group of answer choicesIf taxes increase, consumption increases and aggregate demand shifts right.If taxes increase, consumption decreases and aggregate demand shifts left.If taxes decrease, consumption increases and aggregate demand shifts left.If taxes decrease, consumption decreases and aggregate demand shifts right.
Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0.6Y (1)I = 200 (2)There is a boost in investment making total investment now 300. What would happen if the marginal propensity to consume increases to 0.8? What is the consumption of equilibrium?
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.