Question

Assume the MPC is 0.75 and lump sum taxes are collected by the government. What is the government tax multiplier

a) -1.33
b) -25
c) -.75
d) -4
e) -3

Answer 1

To calculate the government tax multiplier with an MPC of 0.75, we use the formula -MPC / (1 - MPC), which gives us -3 as the correct answer. The correct answer is E.

Step-by-step explanation:

The question asks us to determine the government tax multiplier given that the Marginal Propensity to Consume (MPC) is 0.75 and lump sum taxes are collected by the government. To calculate the tax multiplier, we use the formula:

Tax Multiplier = -MPC / (1 - MPC)

With an MPC of 0.75, the calculation is as follows:

Tax Multiplier = -0.75 / (1 - 0.75) = -0.75 / 0.25 = -3

Therefore, the correct answer is e) -3.