Question

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is .75. By how much should the government raise taxes to achieve its objective? 
A. $6 billion
B. $9 billion
C. $12 billion
D. $16 billion

Answer 1

Answer:

option c) $ 12 billion

Explanation:

Data provided :

Required reduction in consumption = $ 36 billion

MPC = 0.75

Now,

Total income  = Required reduction in consumption / MPC

or

the Increase in tax = $ 36 billion / 0.75

or

= $ 48 billion

the government can raise the tax = $ 48 billion - $ 36 billion = $ 12 billion

Hence, the answer is option C