For example, let's say consumers receive a tax cut of 50
What will be an ideal response?What will be an ideal response?
If they spent it all, that would add 50 to aggregate demand. But according to the "marginal propensity to consume" (mpc) principle, consumers are likely to use a portion of the tax cut to increase saving or reduce debt. With the mpc of 0.8 that we used for our basic model in Chapter 9, the portion saved will be 0.2 3 50 = 10, leaving 40 for increased consumption. Thus the effect on aggregate demand would be only 40, not 50 (since saving is not part of aggregate demand)
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