Question

If the marginal propensity to consume (MPC) is \(0.6\), find the value of the tax multiplier.

• A. \(0.25\)
• B. \(-0.25\)
• C. \(1.5\)
• D. \(-1.5\)

Hint:

Remember:

• Tax Multiplier: \[ k_T=-\frac{MPC}{1-MPC} \]
• Tax multiplier is always negative because: \[ \text{Increase in tax} \rightarrow \text{Decrease in income} \]

Answer 1

The Correct Option is D

Concept: The tax multiplier measures the change in national income resulting from a change in taxes. The formula for the tax multiplier is: \[ k_T = -\frac{MPC}{1-MPC} \]

Step 1: Substitute the given value of MPC. Given: \[ MPC = 0.6 \] Using the formula: \[ k_T = -\frac{0.6}{1-0.6} \]

Step 2: Simplify the denominator. \[ 1-0.6 = 0.4 \] Therefore: \[ k_T = -\frac{0.6}{0.4} \]

Step 3: Calculate the value. \[ k_T = -1.5 \] Hence, the value of the tax multiplier is: \[ \boxed{-1.5} \]