The national savings will fall by $40 million. The amount of taxes raised by the Government is $100 billion. The MPC (marginal propensity to consume) is given to be 0.6.
Government increases $100 as lump-sum taxes.
The result of the Government increasing the taxes will reduce the disposal income by the same amount in this case $100 billion.
Disposal income is Total output - Taxes
MPC is 0.6
The consumption function is (MPC × T)
= -$100 billion × 0.6
= - $60 billion.
The change in national savings will be -T - ((MPC × T)
= -100 - (-$60 billion)
= - $40 billion.
So when the Government increases the lump-sum taxes by $100 billion this will result in the national saving going down by $40 million. The marginal propensity to consume is the measure that the consumption of people changes to a change in their income.
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