Question

If the marginal propensity to consume (mpc) is 0.9, the spending multiplier is _____, the tax multiplier is ______, and the balanced budget multiplier is _______, respectively.

Answer 1

Answer:

If the marginal propensity to consume (mpc) is 0.9, the spending multiplier is 10, the tax multiplier is -9, and the balanced budget multiplier is 1, respectively.

Explanation:

These can be calculated as follows:

a) Calculation of spending multiplier

To calculate this, we use the formula for calculating the spending multiplier as follows:

Spending multiplier = 1 / (1 - mpc)

Since mpc = 0.9, we have:

Spending multiplier = 1 / (1 - mpc) = 1 / (1 - 0.9) = 1 / 0.1 = 10

b) Calculation of tax multiplier

To calculate this, we use the formula for calculating the tax multiplier as follows:

Tax multiplier = -mpc / mps

Note that the tax multiplier as given above is negative because increase in tax by the government makes the multiplier to work in reverse since the money is leaving the circular flow.

Since what is not consumed is saved, we have:

mps = 1 - mpc = 1 - 0.9 = 0.1

Therefore,

Tax multiplier = -0.9 / 0.1 = -9

c) Calculation of balanced budget multiplier

To calculate this, we use the formula for calculating the balanced budget multiplier as follows:

Balanced budget multiplier = Spending multiplier + Tax multiplier = 10 + (-9) = 10 - 9 = 1

Note that balanced budget multiplier is always equal to 1 as obtained above.

Conclusion

Therefore, if the marginal propensity to consume (mpc) is 0.9, the spending multiplier is 10, the tax multiplier is -9, and the balanced budget multiplier is 1, respectively.