The government raises lump-sum taxes on income by $100 billion, and the classical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, investment.

A) rises by $40 billion.
B) rises by $60 billion.
C) falls by $60 billion.
D) falls by $40 billion.

D) falls by $40 billion.

Explanation:

Since the government has raised the lump sum taxes on income to $100billion and the marginal propensity to consumer is 0.6

Therefore to find the consumption level

$100,000,000,000.00 * 0.6 = $60,000,000,000.00

Hence, the investment level too falls by $40,000,000,000.00

In other words, Private consumption falls by 60 billions. Thus, private saving falls by 40 billions.

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