Given the following information calculate the multiplier effect on Y, i.e. by how much does output increase or decrease by (?Y), if
HINT: Unless told otherwise, assume other factors are held constant. For example if you are told that only government spending increases or decreases, then assume that ?a = 0, ?T = 0, and ?I = 0.
(a) Government spending increases by $10, and the MPC, b = 0.5? What value (i.e., number) does the government purchases multiplier [1/(1-b)] have in this case?
(b) Government spending increases by $10, and the MPC, b = 0.9? What value (i.e., number) does the government purchases multiplier [1/(1-b)] have in this case?
(c) In which case [(a) or (b)] does government spending have more impact (if any) on the change on output, Y? What's causing the difference (if you find any)?
(d) Taxes decrease by $10, and the MPC, b = 0.90. Be very careful with this one. The tax multiplier is a little bit trickier. What value (i.e., number) does the tax multiplier have in this case?
(e) Investment decreases by $10, and the MPC, b = 0.20. What value (i.e., number) does the autonomous expenditures multiplier [1/(1-b)] have in this case?
(f) Government spending increases by $10 and investment decreases by $14, and taxes decrease by $5, and the MPC = 0.8?