Question

If Taxes were cut by 1 trillion and the MPC was .70 by how much would...

If Taxes were cut by 1 trillion and the MPC was .70 by how much would total spending?

A.Increase in the first year with two spending cycles?

B. Increase in three years, with two spending cycles per year?

C. Increase over an Infinite Time Period per year?

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Homework Answers

Answer #1

1.

In the first cycle of first year=0.7*$1 trillion=700 billion
In the second cycle of first year=0.7*700=490 billion
Total=700+490=$1190 billion.

2.

Year Spending cycle Total Spending( billion) Change in spending( billion)
1 0.70*1=700 700
1 2 490+700=1190 700*0.7=490
1 1190+343=1533 490*0.7=343
2 2 1533+240.2=1773.1 343*0.7=240.1
1 1773.1+168.07=1941.17 240.1*0.7=168.07
3 2 1941.17+117.649=2058.819 168.07*0.7=117.649

3.
Tax multiplier=MPC/(1-MPC)=0.7/(1-0.7)=2.33
Total change=2.33*1 =$2.33 trillion

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