Question

TABLE 11-1 (Figures in Trillions of Dollars)
Tax	Real Disp. Inc.	Plan'd Cons.	Plan'd Saving	Plan'd Inv.	Gov't Spend.	Net Exp.	Total Plan'd Exp.
1 1 1 1 1 1	7 8 9 10 11 12	6.1 6.9 7.7 8.5 9.3 10.1	0.9 1.1 1.3 1.5 1.7 1.9	0.8 0.8 0.8 0.8 0.8 0.8	1 1 1 1 1 1	0.7 0.7 0.7 0.7 0.7 0.7	8.6 9.4 10.2 11.0 11.8 12.6

21. Refer to Table 11-1. Calculate the APC if real national income is $10 trillion.

22. Refer to Table 11-1. Calculate the tax multiplier.

Answer 1

Question 21

When real national income is $10 trillion then planned consumption is $8.5 trillion.

Calculate the average propensity to consume (APC) -

APC = Planned consumption/Real national income

APC = $8.5 trillion/$10 trillion

APC = 0.85

The average propensity to consume (APC) is 0.85

Question 22

The given table shows that each $1 trillion increase in real national income leads to $0.8 trillion increase in planned consumption.

Calculate the marginal propensity to consume (MPC) -

MPC = Change in planned consumption/Change in real national income

MPC = $0.8 trillion/$1 trillion

MPC = 0.8

The marginal propensity to consume (MPC) is 0.8

Calculate the tax multiplier -

Tax multiplier = -MPC/(1 - MPC)

Tax multiplier = -0.8/(1 - 0.8) = -0.8/0.2 = -4

The tax multiplier is -4