d. If we relax the assumption of no taxes, automatic changes in tax revenue as income changes will have what effect on the size of the multiplier?

Answer (5 points)

1 point: Multiplier = 1/(1 − MPC ) = 1/(1 − 0.8) = 1/0.2 = 5 1 point: $50 million × 5 = $250 million 1 point: It would decrease.

1 point: The multiplier is 1/(1 − MPC ). A fall in MPC increases the denominator,

(1 − MPC ), and therefore decreases the multiplier.

1 point: Decrease it