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Suppose the marginal propensity to consume is equal to 0.75. If the government lowers tax rates and tax revenue falls by $100 million, then disposable income will increase by________ million and consumption spending will initially increase by ________ million.

Respuesta :

Answer:

$100; $75

Explanation:

Given that:

  • Tax revenue falls by 100 million dollars
  • marginal propensity to consume (MPC) is 0.75.

Due to the fall in tax revenue, disposable income will increase by the same amount, that is, $100 million.

Consuption spending will initially increase by $75 million, as shown below:

= MPC × tax revenue fall

= 0.75 × $100,000,000 = $75,000,000

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