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With MPC of 0.8, a lump-sum tax rise of Rs 100 reduces equilibrium income by
ARs 80
BRs 500
CRs 400
DRs 100
Answer & Solution
Correct answer: C. Rs 400
The tax multiplier is minus c over 1 minus c, which is minus 4 for c of 0.8, so income falls by Rs 400.
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