Question

Suppose the MPC of the US is estimated to be 0.33, what will be the addition to national output if the US government spends $30b? Suppose the US government gives a tax cut of an equivalent amount; will the outcome be different? Why?

Answer 1

The spending multiplier=1/(1-MPC)

=1/(1-0.33)

=1.49253731

the increase in national output because of increase in government spending=govenment spending *multiplier

=30*1.49253731

=$44.78 b

the tax multiplier=-MPC/(1-MPC)

=-0.33/(1-0.33)

=-0.492537313

the increase in output because of tax cut= tax cut amount *tax multiplier

=(-30)*(-0.492537313)

=14.78 b

the output is different because the portion of the tax cut is saved by the peoples and the government spending is going into the economy directly