Question

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, what happens to private saving?

1) Private saving increases by $100 billion
2) Private saving decreases by $100 billion
3) Private saving remains unchanged
4) Private saving increases by $60 billion
5) Private saving decreases by $60 billion

Answer 1

Private saving remains unchanged

Step-by-step explanation:

The government raises lump-sum taxes on income by $100 billion, which does not change the output in the neoclassical economy. If the marginal propensity to consume is 0.6, private saving remains unchanged.