marginal propensity to consume

[ranjankumarnayak5]

Assume the marginal propensity to consume is .8. To offset a fall in income of
1,000, the government should
A. increase taxes by Rs.200.
B, raise taxes by Rs.250.
C. increase government spending and taxes by Rs. 1,000.
D. cut taxes by Rs.200.

[ahlashi]

ans ; cut taxes by 200

[ranjankumarnayak5]

Alhasi, please tell me how??

Thanks,

[Kajol]

How are you getting D as the answer Ahlashi?
If the government will cut taxes by 200, then income will increase only by 800 but we need an increase in income of 1000.

On May 4, 2016 8:27 PM, "ranjankumarnayak5 [via Discussion forum]" <[hidden email]> wrote:

Alhasi, please tell me how??

Thanks,

---

If you reply to this email, your message will be added to the discussion below:

http://discussion-forum.2150183.n2.nabble.com/marginal-propensity-to-consume-tp7600353p7600355.html

To start a new topic under General Discussions, email [hidden email]
To unsubscribe from Discussion forum, click here.
NAML

[ranjankumarnayak5]

Thank you Kajol!

[Var1995]

ans will be c. when govt raises both its expenditure and taxes by the same amount, the multiplier is 1. so the output rises by the same amount.

[ahlashi]

How i proceeded is :
given mpc=.8
so multiplier = 5
now if govt cut taxes by 200 , output rises by 5*200 = 1000
and thu offsets the initial fall

[Kajol]

In the case of taxes, multiplier = -c/(1-c)
When government reduces taxes by 200
∆Y = (-c/1-c)* ∆T
      = (-0.8/1-0.8)*(- 200)
      =( - 4)* (-200)
      = 800
So Income will increase only by 800 in this case.

On May 4, 2016 11:17 PM, "ahlashi [via Discussion forum]" <[hidden email]> wrote:

How i proceeded is :
given mpc=.8
so multiplier = 5
now if govt cut taxes by 200 , output rises by 5*200 = 1000
and thu offsets the initial fall

---

If you reply to this email, your message will be added to the discussion below:

http://discussion-forum.2150183.n2.nabble.com/marginal-propensity-to-consume-tp7600353p7600367.html

To start a new topic under General Discussions, email [hidden email]
To unsubscribe from Discussion forum, click here.
NAML

[ahlashi]

got it
thanks a lot kajol