For a Marginal Propensity to Consume of 0

question 55

Multiple Choice

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is larger than the multiplier effect of a tax cut of $100 billion because:

• A)the government pays a higher price than households for the same goods and services.
• B)production of the goods and services the government purchases has a bigger impact on real GDP than production of consumer goods.
• C)many households fail to file their income tax and claim their refund.
• D)in the first round of spending only $90 billion of the tax cut will be spent and $10 billion will be saved, while the entire $100 billion of government purchases will be spent.

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