Commerce Exam > Commerce Questions > Based on the fiscal policy multiplier discuss...
Start Learning for Free
Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?
- a)Y increases by ₹500.
- b)Y decreases by ₹400.
- c)Y increases by ₹400.
- d)Y decreases by ₹500.
Correct answer is option 'B'. Can you explain this answer?
Most Upvoted Answer
Based on the fiscal policy multiplier discussed, if the marginal prope...
From the formula Y* = [1/(1-c)] (C̅ - cT + cTR̅ + I + G), an increase in T reduces Y by c/(1-c) * ΔT. With c=0.8, multiplier = 0.8/0.2 = 4, so ΔY = -4 * 100 = -₹400 (decrease).
Free Test
FREE
| Start Free Test |
Community Answer
Based on the fiscal policy multiplier discussed, if the marginal prope...
Understanding Fiscal Policy Multiplier
The fiscal policy multiplier measures the effect of a change in fiscal policy (like taxes) on overall economic output or equilibrium income (Y).
Key Concept: Marginal Propensity to Consume (c)
- The marginal propensity to consume (c) is the fraction of additional income that households will spend on consumption.
- In this scenario, c is 0.8, meaning that for every additional ₹1 earned, ₹0.80 is spent.
Impact of Tax Increase
- An increase in lump-sum taxes (T) by ₹100 reduces disposable income.
- The reduction in disposable income leads to a decrease in consumption, calculated as:
Consumption decrease = c * Tax increase
= 0.8 * ₹100
= ₹80
Application of the Multiplier Effect
- The fiscal multiplier (k) is calculated as:
k = 1 / (1 - c)
= 1 / (1 - 0.8)
= 5
- The overall impact on equilibrium income (Y) from the decrease in consumption can be calculated as:
Change in Y = Multiplier * Change in Consumption
= 5 * (-₹80)
= -₹400
Conclusion
- Therefore, the equilibrium income (Y) decreases by ₹400 due to the increase in lump-sum taxes by ₹100, confirming that option 'B' is correct.
This illustrates how tax policy can significantly affect overall economic activity through changes in consumer behavior and spending.
The fiscal policy multiplier measures the effect of a change in fiscal policy (like taxes) on overall economic output or equilibrium income (Y).
Key Concept: Marginal Propensity to Consume (c)
- The marginal propensity to consume (c) is the fraction of additional income that households will spend on consumption.
- In this scenario, c is 0.8, meaning that for every additional ₹1 earned, ₹0.80 is spent.
Impact of Tax Increase
- An increase in lump-sum taxes (T) by ₹100 reduces disposable income.
- The reduction in disposable income leads to a decrease in consumption, calculated as:
Consumption decrease = c * Tax increase
= 0.8 * ₹100
= ₹80
Application of the Multiplier Effect
- The fiscal multiplier (k) is calculated as:
k = 1 / (1 - c)
= 1 / (1 - 0.8)
= 5
- The overall impact on equilibrium income (Y) from the decrease in consumption can be calculated as:
Change in Y = Multiplier * Change in Consumption
= 5 * (-₹80)
= -₹400
Conclusion
- Therefore, the equilibrium income (Y) decreases by ₹400 due to the increase in lump-sum taxes by ₹100, confirming that option 'B' is correct.
This illustrates how tax policy can significantly affect overall economic activity through changes in consumer behavior and spending.
|
Explore Courses for Commerce exam
|
|
Top Courses for CommerceView all
Question Description
Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer? for Commerce 2025 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer? covers all topics & solutions for Commerce 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer?.
Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer? for Commerce 2025 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer? covers all topics & solutions for Commerce 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer?.
Solutions for Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer? in English & in Hindi are available as part of our courses for Commerce.
Download more important topics, notes, lectures and mock test series for Commerce Exam by signing up for free.
Here you can find the meaning of Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer? defined & explained in the simplest way possible. Besides giving the explanation of
Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer?, a detailed solution for Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer? has been provided alongside types of Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer? theory, EduRev gives you an
ample number of questions to practice Based on the fiscal policy multiplier discussed, if the marginal propensity to consume (c) is 0.8, lump-sum taxes (T) increase by ₹100, and assuming no change in other variables, what is the impact on equilibrium income (Y)?a)Y increases by ₹500.b)Y decreases by ₹400.c)Y increases by ₹400.d)Y decreases by ₹500.Correct answer is option 'B'. Can you explain this answer? tests, examples and also practice Commerce tests.
|
|
Explore Courses for Commerce exam
|
|
Signup for Free!
Signup to see your scores go up within 7 days! Learn & Practice with 1000+ FREE Notes, Videos & Tests.
|
© EduRev
|
Education Revolution
|
|
Signup to see your scores
go up
within 7 days!
within 7 days!
Takes less than 10 seconds to signup