The government raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts? a. Public saving. b. Private saving.

(b) Increases by $100 billion.

(b) Decreases by $40 billion.

Explanation:

Given that,

Taxes rises by the government = $100 billion

Marginal propensity to consume, MPC = 0.6

(a) Public savings refers to the savings that is done by the government. It is calculated as the difference between government spending and taxes collected by the government.

Government spending = $0

So, the public savings increases by $100 billion.

(b) Private savings refers to the savings that is done by the households.

Change in consumption (Falls):

= MPC * Increase in taxes

= 0.6 * $100 billion

= $60 billion

Private savings:

= Income - Taxes - Consumption

= $0 - $100 billion - (-$60 billion)

= - $100 billion + $60 billion

= - $40 billion

Therefore, the private savings decreases by $40 billion.