Question

2) During a Recession, the MPC tends to a) Increase, increases b) Decrease, decreases c) Decrease, increases d Increase, decreases which the recessionary gap 3) Suppose that the MPC is .75 and the U.S Federal Government reduces taxes by 10 million dollars. After 3 rounds of the multiplier process RGDP will change by a) 4.23 million b) 17.34 million c) 23.13 million dollars. d) 30 million 4) "George W. Bush's $152 billion tax rebate plan of 2008 was designed to stimulate the U.S. economy, but it didn't work." The tax cut didn't work because a) it wasn't big enough b) people chose to save the tax cut c) it created a budget deficit d) other policies offset it

Answer 1

2. The correct answer is 'Option C'.

MPC stands for Marginal Propensity to Consume. It refers to the change in consumption due to a change in income.

During a recession, the consumers tend to consume less because of low confidence on the market and prefer saving more. Recessionary gap shows that the economy is operating at a level below the full employment level. The MPC falls during recession because consumers consume lesser proportion of their increased income. As a result, there is an increase in the recessionary gap.