Answer to Question #65338 in Macroeconomics for Rubal

Question

C=a+MPC*Yd and suppose mpc=0.8,t=0 and m=0

Answer 1

Let’s see what the situation will be like if economy acts so when income tax rate (t) is equal 0, multiplier of autonomous expenditures (m) is equal to 0 and eventually the marginal propensity to consumption (mpc) is 0.8.

 The level of mpc=0.8 describes the economy where the 80% income goes to consumption and only 20% to saving. This kind of fact will cause slower rates of economic growth for the future!

 Income tax is one of the major tax group and if its rate is 0, it means first of all that Yd=Y-T=Y, as T=tY. In real life it will be difficult for government to keep budget balance, as there are expensive public expenditures that should be financed in proper level!

 There will be no effect on GDP if consumption level rise when m=0. This sort of unbelievable situation explains that there are great problems in autonomous expenditures!