If you appreciate our work, consider supporting us:

QUESTION:
he following graph plots an aggregate demand curve.
Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy.
Suppose the governments of two very similar economies, economy Y and economy Z, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy Y is 0.85 and the MPC in economy Z is 0.8. The economies are otherwise completely identical.
The tax cut will have a larger impact on aggregate demand in the economy with the    .

ANSWER:

The following graph plots an aggregate demand curve.
Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy.
Points:
1 / 1
Close Explanation
Explanation:
A tax hike reduces after-tax household income and leads to a reduction in consumption spending. The quantity of output demanded will be lower at each price level. Therefore, a tax hike shifts the aggregate demand curve to the left.
Suppose the governments of two very similar economies, economy Y and economy Z, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy Y is 0.85 and the MPC in economy Z is 0.8. The economies are otherwise completely identical.
The tax cut will have a larger impact on aggregate demand in the economy with thelarger MPC  Correct .
Points:
1 / 1
Close Explanation
Explanation:
A larger marginal propensity to consume (MPC) means that consumers spend a larger amount of each additional dollar of after-tax income. That is, the greater the MPC, the greater the multiplier effect of a change in taxes. The smaller the MPC, the smaller the multiplier effect of a change in taxes.

Posted by Cleveland on September 17, 2024
Back to Questions