What happens to the autonomous expenditure multiplier when proportional taxes are introduced?

Correct Answer: It reduces because taxes reduce the MPC (Marginal Propensity to Consume)

Subject: economics

• It increases because taxes increase MPC
• It reduces because taxes reduce the MPC (Marginal Propensity to Consume)
• It remains constant
• It becomes negative

Explanation: • <b>Key Fact</b> Proportional taxes reduce disposable income, thereby reducing the amount households consume from additional income (reducing MPC). • <b>Supporting Detail</b> A lower MPC means the autonomous expenditure multiplier will reduce. • <b>Related Concept</b> MPC + MPS = 1. • <b>Why wrong options are wrong</b> Taxes take money away, so people consume less (MPC goes down, not up). • <b>Exam Trick</b> Tax introduced = Less money in hand = Smaller Multiplier. • <b>Additional Info</b> This acts as an automatic stabilizer for the economy.

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