If the tax rate is 0.1, and the marginal propensity to consume is 0.5, the multiplier is:

Question

BlackTom AI · Accepted Answer

We are given a macroeconomics question about the spending multiplier when a tax rate applies. The key formula for the multiplier with taxes is: Multiplier = 1 / [1 − c × (1 − t)], where c is the marginal propensity to consume and t is the tax rate.

Option 1: 2. This would imply a multiplier of 2, which would require c × (1 − t) to equal 0.5, since 1 / (1 − 0.5) = 2. With c = 0.5 and t = 0.1, we get c × (1 − t) = 0.5 × 0.9 = 0.45, so the resulting multiplier is 1 / (1 − 0.45) = 1 / 0.55 ≈ 1.818, not 2. Therefore this option is too large.

Option 2: 2.1. This would require the denominator to be 1 / 2.1 ≈ 0.476, meaning 1 − c × (1 − t) ≈ 0.476, or c × (1 − t) ≈ 0.524. Given c × (1 − t) = 0.45 from the provided values, this option does not align with the calculation, so it is incorrect.

Option 3: 1. This would occur if c × (1 − t) = 0, which would require either c = 0 or (1 − t) = 0 (i.e., t = 1). Since neither is true here (c = 0.5 and t = 0.1), this option is inconsistent with the data and is incorrect.

Option 4: 1.8. Applying the formula with c = 0.5 and t = 0.1 gives: c × (1 − t) = 0.5 × 0.9 = 0.45, and then 1 − 0.45 = 0.55, so the multiplier = 1 / 0.55 ≈ 1.818, which rounds to 1.8. This matches the computed value based on the given parameters, making it correct in the context of typical rounding.

In summary, the accurate computation yields a multiplier around 1.818, which aligns with option 1.8 when rounded to one decimal place, while the other options deviate from the calculation by misaligning with the effect of the tax rate on the spending multiplier.

If the tax rate is 0.1, and the marginal propensity to consume is 0.5, the multiplier is:

View Explanation

Log in for full answers

Similar Questions

If the MPC = 4/5, then the government purchases multiplier is

Which of the following statements is false?

Suppose the government increases its purchases by $50 billion. If the multiplier effect exceeds the crowding-out effect, then:

Suppose real GDP is $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.7. If the government increases spending by $10 billion, real GDP will increase by $:

If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential GDP of $14.5 trillion, then government purchases would need to increase by $250 billion to restore the economy to potential GDP.

If the government spends an extra $5 billion on goods and services, GDP will:

39. If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by A. increasing government spending by $25 billion. B. increasing government spending by $80 billion. C. decreasing taxes by $25 billion. D. decreasing taxes by $100 billion.

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler