a) Using Disney World in Orlando as an example, explain the multiplier. What are

Question

a) Using Disney World in Orlando as an example, explain the multiplier. What are the three things that influence the multiplier and explain how they impact the number?

b) If the MPC is .9 and there are no leakages to the economy, what will the multiplier be? If there is a recessionary gap of $40m, how much money would the government have to inject into the economy to bring it back to long run equilibrium?

c) To get rid of the recessionary gap the government decides to cut taxes instead of increasing spending. The amount of the tax cut is the same as what would have been injected in part b). Will the decrease in taxes have the same effect as the increase in government spending? Why or why not?

Explanation / Answer

Ans

Disney invests in Disney world. Now labour gets income for their services. They inturn buy goods from stores. This forms income of shopkeepers. Thus it increases income and employment in second round. They inturn demand goods from retailers. Thus income and employment rises in third round. The retailers inturn buy goods from factories. Thus income and employment will rise in 4th round. In this way an initial increase in investment Leds to multiple rise in income. This phenomenon is called multiplier effect. The 3 factors are

Mpc=greater the mpc greater the multiplier

Mps =greater the Mps smaller the multiplier

Imports=greater the imports smaller the multiplier

2 multiplier =1/1-mpc=1/1-.9=10.Govt must inject =40/10=4million

3 No it doesn't have same effect since Govt expenditure multiplier is always greater than tax multiplier

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