Assume that the marginal propensity to consume is 0.8. The tax multiplier will then be ................
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → -4
The tax multiplier (MT) measures the change in equilibrium income due to a change in taxes.
The formula for the tax multiplier is: MPC/ (1-MPC)
MPC=0.8
MT= - 0.8/ 0.2 = -4