Correct! When taxpayers are provided a decrease in taxes, some of that is saved, and therefore does not work through the economy. To calculate the amount of the tax decrease required to achieve a specific increase in total spending, first divide the desired change in total income by the multiplier. This results in the required change in total spending. In this case, total income needs to increase by $1,000, and in Part b above it was calculated that an increase in total spending of $400 is required. Dividing this by the MPC yields the required tax change, or $4000.6 = $666.67
To recap, a tax decrease of $666.67 would result in $400 (= $666.67 x 0.6) additional consumer spending. Since the multiplier is 2.5, this $400 additional consumption spending would have a multiplied impact on the economy of $1,000.
Alternatively, the formula for the tax multiplier is MPC x multiplier = MPC x 1MPS = or 0.6 x 2.5 = 1.5. Since equilibrium income needs to increase by $1,000, the tax decrease is calculated by dividing this change in income by the tax multiplier. In this case, $1,000 ÷ 1.5 = $667, which is the required tax decrease.
Incorrect! When taxpayers are provided a decrease in taxes, some of that is saved, and therefore does not work through the economy. To calculate the amount of the tax decrease required to achieve a specific increase in total spending, first divide the desired change in total income by the multiplier. This results in the required change in total spending. In this case, total income needs to increase by $1,000, and in Part b above it was calculated that an increase in total spending of $400 is required. Dividing this by the MPC yields the required tax change, or $4000.6 = $666.67
To recap, a tax decrease of $666.67 would result in $400 (= $666.67 x 0.6) additional consumer spending. Since the multiplier is 2.5, this $400 additional consumption spending would have a multiplied impact on the economy of $1,000.
Alternatively, the formula for the tax multiplier is MPC x multiplier = MPC x 1MPS = or 0.6 x 2.5 = 1.5. Since equilibrium income needs to increase by $1,000, the tax decrease is calculated by dividing this change in income by the tax multiplier. In this case, $1,000 ÷ 1.5 = $667, which is the required tax decrease.