Answered

if the mpc in an economy is 0.80, government could close a recessionary expenditure gap of $160 billion by cutting taxes by multiple choice $128 billion. $200 billion. $160 billion. $80 billion.



Answer :

The government can close a recessionary expenditure gap of $160 billion by cutting taxes by $200 billion. So, the correct answer is (b).

Given information,

Expenditure gap (consumption) = $160

Marginal propensity to consume (MPC) = 0.80

Let, income be Y

Marginal Propensity to Consume (MPC) = Consumption/ Y

Income (Y) = $160/0.80 = $200

A measure called marginal propensity to consume (MPC) quantifies the assumption of induced consumption, which maintains that because a boost in disposable income results in a rise in personal consumer expenditure (consumption). Marginal propensity to consume is the percentage of discretionary income that people can spend on spending. MPC is the proportion of extra revenue that a consumer is willing to pay.

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