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AP® Macroeconomics

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Dollar Impact of a Tax Increase on Aggregate Demand

APMACR-NJG5RL

Given a marginal propensity to save (MPS) of 0.25, a government tax increase of $500 million would be expected to provide a

A

$2 billion contractionary effect.

B

$2 billion stimulus effect.

C

$3.75 billion contractionary effect.

D

$1.5 billion stimulus effect.

E

$1.5 billion contractionary effect.