1

Practice question
• Assume the consumption function is of the form
C = 200 + (0.75)YD and the income tax rate is t = 0.2. What
would be the effect of an increase in government transfers of
200?

• A) An increase in income of 800

• B) An increase in income of 500

• C) An increase in income of 375

• D) An increase in income of 300

• E) An increase in income of 125

 2

Practice question
• If the savings function is S = - 400 + (0.25)YD, the marginal income tax rate is t = 0.2,
and the equilibrium level of income increases by 1,000, by how much will
consumption change?

• A) 250

• B) 400

• C) 600

• D) 750

• E) 800