In an economy with lump-sum taxes and no international sector, assume that the aggregate supply curve is horizontal. If the marginal propensity to consume is equal to 0.8, which of the following will necessarily be true?
(a) The average propensity to consume will be less than the marginal propensity to consume
(b) The government expenditure multiplier will be equal to 5
(c) A $10 increase in consumption spending will bring about an $80 increase in disposable income
(d) Wealth will tend to accumulate in the hands of a few people
(e) The economy will be running a deficit, since consumption expenditure exceed personal saving
Ans: (b) The government expenditure multiplier will be equal to 5
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