Why does the autonomous expenditure decreases

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Reference no: EM13191356

Could someone please help me understand this? Assume the price level is fixed.

When the government increases taxes it effects consumption indirectly through disposable income. Consumers will save some of it depending on the mpc. Therefore, the change in the AE's autonomous expenditure is 9.

On the other hand, if the government increases taxes by 10, using the same logic, AE's autonomous expenditure will decreases by 9. But how can you explain this is words? We can't say consumers are going to save a portion of the 10 taxes because you can't save something that is being taken away from you. Why does the autonomous expenditure decrease by a fraction of the tax in this case?

Reference no: EM13191356

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