Question

Assuming a fixed amount of taxes in a closed economy and that the marginal propensity to consume equals 0.50 calculate the value of the following multipliers be sure to use a negative sign to show if a multiplier has a negative value the government purchases multiplier equals?

The tax multiplier equals?

The balanced budget multiplier equals?

Answer 1

(a)

Calculate the value of government purchase multiplier -

Government purchase multiplier = 1/(1-MPC) = 1/(1-0.50) = 1/0.50 = 2

The government purchases multiplier equals 2.

(b)

Calculate the value of tax multiplier -

Tax multiplier = -MPC/(1-MPC) = -0.50/(1-0.50) = -0.50/0.50 = -1

The tax multiplier equals -1.

(c)

Calculate the value of balanced budget multiplier -

Balanced budget multiplier = Government purchases multiplier + Tax multiplier = 2 + (-1) = 2 - 1 = 1

The balanced budget multiplier equals 1.