Question

Answer the following questions about the tax multiplier: Instructions: In parts a and b, round your answer to 2 decimal places. In part c, enter your answers as a whole number. If you are entering a negative number include a minus sign. a. Suppose the marginal propensity to consume (MPC) for a nation is 0.9. What is the tax multiplier for this nation

Answer 1

Answer: -9

Explanation:

The Tax multiplier of a nation shows how much the aggregate demand of an economy will change if there is a change in taxes.

It is calculated by the formula:

= -MPC / ( 1 - MPC)

= -0.9 / (1 - 0.9)

= -9

If taxes are reduced, aggregate demand would increase by 9 times.