Homework Answers
Marginal propensity to consume = 0.6
Government expenditure and lump sum taxes are both increased by 100
Equilibrium income will rise by 100
option(B)
Spending Multiplier = 1/(1-MPC = 1/1-0.6 = 2.5
Income increases by 100*2.5 = 250
Tax multiplier = -MPC/(1-MPC) = -0.6/0.4 = -1.5
Income decreases by 100*1.5 = 150
so, Net increase =250-150 =100
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