Suppose a $100 Autonomous Net Tax Is Introduced in an Economy

question 23

Multiple Choice

Suppose a $100 autonomous net tax is introduced in an economy with an MPC equal to 0.8.How will this affect equilibrium real GDP demanded at each level of real GDP?  

• A) The equilibrium real GDP demanded will increase by $100. 
• B) The equilibrium real GDP demanded will increase by more than $100. 
• C) The equilibrium real GDP demanded will decrease by less than $100. 
• D) The equilibrium real GDP demanded will decrease by more than $100.

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Definitions:

External Cost

represents a negative spillover effect of an economic transaction on a third party who was not involved in the transaction.

External Costs

Costs that are not borne by the parties involved in economic transactions but are imposed on others, such as environmental pollution.

External Benefits

Advantages that accrue to individuals or society indirectly participating in an economic transaction or activity.

Market Outcome

The result of all buyers' and sellers' interactions in a market, determined by factors like price, quantity, and quality of goods and services.