A Not So Simple Multiplier react-empty: 2724 In the Keynesian Macro Model II whe
ID: 1126655 • Letter: A
Question
A Not So Simple Multiplier
react-empty: 2724
In the Keynesian Macro Model II where aggregate expenditures equals aggregate output and "leakages" equals "injections" we have the equation:
react-empty: 2728
react-empty: 2731
Remember that is the marginal propensity to consume: MPC and is the tax rate on Y
react-empty: 2735
And the marginal propensity to consume is the additional consumption expenditures that are induced by additional income. Let's set the MPC = = 0.8 = 4/5 = 80%
react-empty: 2739
round
Y
=×Y
C=×Yd
cumulative Y
1
100
20
64
2
64
12.8
41
164
3
41
8.2
26.2
205.0
4
26.2
5.2
16.8
231.2
5
16.8
3.4
10.7
248.0
6
10.7
2.1
6.9
258.7
...
13
0 .5
0.1
× Yd
276.9
...
n
277.8
react-empty: 2743
So the initial change in Y of 100, through the circular flow of income and expenditures leads to an overall increase in Y of 500.
react-empty: 2747
The formula for the not so simple multiplier:
react-empty: 2751
mult 1
If = MPC = 0.8, and the tax rate = 20%, then the not so simple multiplier is...
Numeric Answer:
mult 2
If = MPC = 0.75 = 3/4, and the tax rate is 20%, then the no so simple multiplier is...
Numeric Answer:
mult 3
If = MPC = 0.8, and the tax rate = 25% = 0.25, then the not so simple multiplier is...
Numeric Answer:
mult 4
Adding a positive tax rate, , the not so simple multiplier is
A less than the simple multiplier
B the same as than the simple multiplier
C greater than the simple multiplier
round
Y
=×Y
C=×Yd
cumulative Y
1
100
20
64
2
64
12.8
41
164
3
41
8.2
26.2
205.0
4
26.2
5.2
16.8
231.2
5
16.8
3.4
10.7
248.0
6
10.7
2.1
6.9
258.7
...
13
0 .5
0.1
× Yd
276.9
...
n
277.8
Explanation / Answer
In presence of income tax, multiplier is given by 1/1 - mpc(1 - tax rate).
1) mult 1 If = MPC = 0.8, and the tax rate = 20%, then the multiplier is = 1/(1 - 0.8*(1 - 20%)) = 2.778
2) mult 2 If = MPC = 0.75 = 3/4, and the tax rate is 20%, then the no so simple multiplier is 1/(1 - 0.75*(1 - 20%)) = 2.5
3) mult 3 If = MPC = 0.8, and the tax rate = 25% = 0.25, then the not so simple multiplier is 1/(1 - 0.8*(1 - 25%)) = 2.5
4) mult 4
Adding a positive tax rate, , the not so simple multiplier is A less than the simple multiplier because a part of income in the form of tax is now going to the budget.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.