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 0.75. by how much should the government raise taxes to achieve its objective?
a. $6 billionb. $9 billionc. $12 billiond. $16 billion

correct answer is option c i.e $12 billion

Explanation:

consumption reduced by $ 36 billion

marginal propensity to consume (MPC) = 0.75

Tax should be increased by

= \frac{36}{0.75}

= 48 billion( total income (Y) )

max tax can be taken  = Y- C

                                     =48-36

                                   =$12 billion

therefore correct answer is option c

The correct answer to this question is c) $12 million.

Explanation:

For taking out the amount by which government should raise taxes can be taken out by subtracting the consumption from the total income.

Given information -

Consumption reduced by - $36 billion

MPC - .75

Now with the help of given information we can take out the total income as -

Consumption  /  MPC

= $36 billion  /  .75

= $48 billion

Now Taxes raised should be = Total income - Consumption

= $48 - $36 ( billions )

= $12 billions

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