Answer to Question #198776 in Macroeconomics for Kristie

Question #198776

4. Explain how MPC and the multiplier effect would impact a government’s attempt to stimulate its economy in each of the following scenarios.

           a. To stimulate the economy already in a serious recession, the government spends a total of $700 million to send each person a stimulus check of $600. 


1
Expert's answer
2021-05-27T11:59:46-0400

The stimulus check is either mailed out to taxpayer or provides a tax credit. It is considered as a fiscal policy of decreasing tax. The lower tax burden or decreasing tax increases the disposable income of household which boost consumption and saving among consumers and businesses. It encourages individuals and firms to invest or spend more through tax multiplier. It leads to an increase in demand which again encourages businesses to invest more and hire more workers, which leads to more demand. Through this vicious cycle, the MPC impact the output through the multiplier.

The tax multiplier is,

Multiplier = - t/ (1-c+ct)

Here, C is MPC, and t is the tax rate

The decreases in tax increase the value of multiplier which helps to increase in the output through a multiplier effect.

 


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