Derive and Explain the significance of Tax Multiplier and Government Expenditure Multiplier. Why do you think Government Expenditure Multiplier is greater than Tax Multiplier?

4. Why does a reduction in taxes have a smaller multiplier effect than an increase in government spending of an equal amount?

2. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is, and the spending multiplier for this economy is ▼. Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to . This decreases income yet again, causing a second change in consumption equal to .The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD1) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate demand…

In an economy such that: C = 200 + 0.80 (Y – T)           Md = 0.20 Y - 10 R I = 40 - 20 R                            Ms = 200 + BP X = 30 - 0.05 Y                       BP = X + K T = 100                                   K = 20 + 10R G = 150                                                                                               Determine the equilibrium levels of Y and R. If T increases to $150, what are the new Y and R?  What is the tax multiplier?