If the MPC is .8 and the government increases both spending and lump-sum taxes by $100 million, then we would expect:

Question

a) an increase in total income of $500 million
b) a reduction in equilibrium income of $80 million
c)an increase in equilibrium income of $100 million
d)no change in equilibrium income

Answer 1

total income multiplier= 1/(1-.8)=5
a) seems reasonalbe