Consider an economy similar to that in the preceding question in which investment is also $200, government purchases are also $500, net exports are also $30, and the price level is also fixed. But taxes now vary with income and, as a result, the consumption schedule looks like the following:

Find the equilibrium graphically. What is the marginal propensity to consume? What is the tax rate? Use your diagram to show the effect of a decrease of $60 in government purchases. What is the multiplier? Compare this answer to your answer to Test Yourself Question 1 above. What do youconclude?

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GDP laxes DI $1,360 $320 $1,040 $810 1,480 3601,120 870 1,600 400 1,200 930 1,720 4401,280 990 1,840 480 1,360 1,050