Question

For the last time, consider the economy described above. You won't work directly with its numbers in this question, but I'm repeating them in case it's helpful:

Government purchases (NOT including transfer payments) = $800
Transfer payments = $200
Total taxes = $1200
Output (income) = $5200
Consumption = $3000

Let's say the MPC = 0.75 and the government gives a tax cut of $20. As a result, private savings will                            [ Select ]                       ["not change", "fall", "rise"]         , public savings will                            [ Select ]                       ["rise", "not change", "fall"]         and this                            [ Select ]                       ["is", "is not"]         a good idea to stimulate economic investment.

Answer 1

Answer

As a result, private savings will ["rise"], public savings will ["fall"] and this ["is not"] a good idea to stimulate economic investment.

Reason:

Even though a tax cut of a dollar increases private savings by $(1 − marginal propensity to consume), it costs the government $1. The net effect is to reduce national savings by an amount equal to the marginal propensity to consume.