Question

In economics, the multiplier effect refers to the fact that when there is an injection of money to consumers, the consumers spend a certain percentage of it. That amount recirculates through the economy and adds additional income, which comes back to the consumers and of which they spend the same percentage. This process repeats indefinitely, circulating additional money through the economy. Suppose that in order to stimulate the economy, the government institutes a tax cut of $ 8 billion. If taxpayers are known to save 17 % of any additional money they receive, and to spend 83 % , how much total money ( T ) will be circulated through the economy by that single $ 8 billion tax cut?

Answer 1

Answer:

$39.06 billion

Explanation:

MPC = Marginal propensity to consume = 83%, or 0.83

MPS = Marginal propensity to save = 17%, or 0.17

Tax multiplier = - MPC/MPS = - 0.83/0.17 = - 4.88235294117647

Tax cut = - $8 billion

Effect of $8 billion tax cut = Tax multiplier * Tax cut = (- 4.88235294117647) * (- $8 billion) = $39.06 billion

Therefore, $39.06 billion will be circulated through the economy by that single $ 8 billion tax cut.

Answer 2

$39.06 billion will be circulated through the economy by that single $ 8 billion tax cut.

Calculation Marginal propensity  

The MPC is = Marginal propensity to consume = 83%, or 0.83

Then MPS is = Marginal propensity to save = 17%, or 0.17

Then Tax multiplier is = - MPC/MPS = - 0.83/0.17 = - 4.88235294117647

After that Tax cut is = - $8 billion

Then Effect of $8 billion tax cut is = Tax multiplier * Tax cut = (- 4.88235294117647) * (- $8 billion) is = $39.06 billion

Thus, $39.06 billion will be circulated through the economy by that single $ 8 billion tax cut.

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