Consider a Consumption Function in a Simple Macro Model with Government

question 108

Multiple Choice

Consider a consumption function in a simple macro model with government and taxes.Given a marginal propensity to consume out of disposable income of 0.7 and a net tax rate of 30% of national income,the marginal propensity to consume out of national income is

• A)0.49.
• B)0.58.
• C)0.70.
• D)0.90.
• E)1.00.

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Definitions:

Diminishing Marginal Utility

The principle stating that as more of a good or service is consumed, the marginal benefit of additional units will decline.

Utility Maximization

The process by which consumers adjust their consumption to achieve the highest level of satisfaction from their available resources.

Marginal Utility

The incremental pleasure or advantage obtained by consuming an extra unit of a good or service.

Price Ratio

The ratio or comparison between the prices of two different goods or services.