Given MPC (marginal propensity to consume) = 0.75, if the government implements an expansionary fiscal policy as (a) cutting taxes by $10 billion, then by how much would total spending increase over an infinite period? (b) spending $10 billion, then by how much would total spending increase over an infinite period?
Please check the solution to (a) and (b) of the following problem for accuracy and elaborate:
Given MPC (marginal propensity to consume) = 0.75, if the government implements an expansionary fiscal policy as
(a) cutting taxes by $10 billion, then by how much would total spending increase over an infinite period?
(b) spending $10 billion, then by how much would total spending increase over an infinite period?
MPC = 0.75
Tax multiplier = (-MPC / 1) = (-0.75 / 1 – 0.75) = (-0.75 / 0.25) = -3.
(a) Cutting taxes by $10 billion.
The total spending increase by (-3) (-$10 billion) = $30 billion.
Spending multiplier = (1/1 – MPC) = (1 / 1 – 0.75) = 1 / 0.25 = 4
(b) Spending 1ncrease by 10 billion.
The total spending increase by (4) ($10 billion) = $40 billion.
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