Respuesta :
The marginal propensity to consume is a metric that quantifies the concept of increase in consumption with an increase in income. Mathematically MPC is defined as:
MPC = Change in consumption / Change in income
Purchase of goods and services is considered as consumption, therefore:
Change in consumption = $16 billion
In the government’s perspective, taxes are considered as income, therefore the problem ask us to find for the necessary change in tax collection to maintain equilibrium GDP. Substituting the values in the formula:
0.80 = $16 billion / Change in income
Change in income = $20 billion
Therefore the government should increase the tax collection by $20 billion.The government should increase taxes by $20 billion in order to maintain the same equilibrium GDP.
Further Explanation:
Marginal propensity to consume (MPC): It can be defined as the degree of responsiveness of the consumption of the services and goods to the change in the level of income. It can be calculated as follows:
[tex]\text{MPC}=\dfrac{\text{Change in consumption}}{\text{Change in income}}[/tex]
Three types of marginal propensity to consume are as follows:
• MPC greater than 1: It refers to changes in levels of income that lead to proportionately large changes in the level of consumption of a service or good.
• MPC equal to 1: It refers to changes in levels of income that lead to proportionately changes in the level of consumption of a service or good.
• MPC less than 1: It refers to changes in levels of income that lead to proportionately small changes in the level of consumption of a service or good.
Calculate the taxes collected by the government in order to maintain the same equilibrium GDP:
[tex]\begin{aligned}\text{MPC}&=\dfrac{\text{Change in the consumption}}{\text{Change in the income}}\\0.80&=\dfrac{\text{\$16 billion}}{\text{Change in the income}}\\\text{Change in the income}&=\dfrac{\text{\$16 billion}}{0.8}\\&={\text{\$20 billion}}\end{aligned}\\[/tex]
Therefore, the government should increase the taxes by $20 billion to maintain the same equilibrium GDP.
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Answer details:
Grade: High School
Subject: Economics
Chapter: Consumer Equilibrium
Keywords: Marginal propensity to consume, equilibrium, GDP, Purchase of goods and services, taxes, consumer equilibrium, gross domestic production.
