Question

If taxes were cut by $1 trillion and the MPC was 0.84, by how much would...
If taxes were cut by $1 trillion and the MPC was 0.84, by how much would total spending
a. Increase in the first year with two spending cycles?
b. Increase over three years, with two spending cycles per year?
c. Increase over an infinite time period?
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Homework Answers

Answer #1

Multiplier=1/(1-MPC)

Tax Multiplier=MPC/(1-MPC)

a.

Increase in first two years=(840)+(0.84*840)=1545.6

b.

Year Spending cycle Total Spending( billion) Change in spending( billion)
1 0.84*1=840 840
1 2 840+705.6=1545.6 840*0.84=705.6
1 1545.6+592.704=2138.304 0.84*705.6=592.704
2 2 2138.304+497.871=2636.175 0.84*592.704=497.871
1 2636.175+418.211=3054.386 0.84*497.871=418.211
3 2 3054.386+351.29=3405.67 0.84*418.211=351.29

c.

Mulitplier=MPC/(1-MPC)=0.84/(1-0.84)=5.25

Increase over an infinite time period=5.25*1=5.25 trillion

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