MPS=.1. What is the tax multiplier? Answer the following: MPS =.4. What Is the g

Question

MPS=.1. What is the tax multiplier? Answer the following: MPS =.4. What Is the government spending multiplier? MPC = .9. What is the government spending multiplier? MPS = .5. What is the government ¡ö-pending multiplier? MPC = .75. What is the tax multiplier? If the government spending multiplier is 6, what is the tax multiplier? If the tax multiplier is -2, what is the government spending multiplier? If government purchases and taxes art increased by $100 billion simultaneously, what will the effect be on equilibrium output (income)?

Explanation / Answer

Government spending multiplier = 1/MPS = 1/(1-MPC)

a. MPS = 0.4
Multiplier = 1/0.4 = 2.5

b. MPC = 0.9
Multiplier = 1/(1-0.9) = 1/.1 = 10

c. MPS = 0.5
Multiplier = 1/0.5 = 2

d. Tax multiplier = -MPC/MPS = -MPC/(1-MPC)

MPC = 0.75
Tax multiplier = -0.75/0.25 = -3

e. MPS = 0.1
MPC = 1-MPS = 0.9
Tax multiplier = -0.9/0.1 = -9

f. Spending multiplier = 6
ie 1/MPS = 6
MPS = 1/6 and MPC = 5/6

Tax multiplier = -MPC/MPS = -(5/6)/(1/6) = -5

g. -MPC/(1-MPC) = -2
MPC = 2 - 2MPC
3MPC = 2
MPC = 2/3 and MPS = 1-2/3 = 1/3

Spending multiplier = 1/MPS = 3

The parts f and g can also be calcultaed directly using the balance budget multiplier: Spending Multiplier + Tax multiplier = 1

h. Increase in output due to increased government spending = 100B * Spending multiplier = 100B * 1/MPS

Decrease in output due to increased taxes = 100B * Tax multiplier = 100B * -MPC/MPS

Net effect = 100*1/MPS + 100B * (-MPC/MPS)

= 100(1-MPC)/MPS = 100 * MPS/MPS = 100B

Thus the equilibrium output will increase by 100B

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