The Multiplier Effect and Possible Scenarios

Suppose Congress and the president decide that the best method to stimulate the economy is to cut taxes. The total amount of tax cuts approved is $300 billion and the current MPC is .80. Determine the initial fiscal stimulus and the cumulative fiscal stimulus for the tax cuts.

Inflation is a growing concern and the Federal Reserve has been unable to curtail consumer spending. Congress and the president decide to cut government spending by $100 billion and the current MPC is .90. Determine the initial fiscal restraint (spending reduction) and the cumulative fiscal restraint.

The economy is slowly entering a recession and there is general agreement that the federal government should stimulate the economy. An increase in government spending is approved in the amount of $200 billion. If the MPC is equal to .75, determine the initial fiscal stimulus and cumulative fiscal stimulus.

Due to inflationary pressures, the federal government decides to cut spending on transfer payment programs by $200 billion. The MPC is currently .80. Determine the amount of the initial fiscal restraint and the cumulative fiscal restraint.

Suppose the federal government wishes to close a recessionary GDP gap of $200 billion using tax cuts. If the MPC = .90, what is the amount of tax cuts necessary to close the gap?

The federal government is concerned about an inflationary GDP gap of $100 billion. A decision is made to reduce government spending to close the gap. By how much does the federal government need to reduce spending to close the inflationary GDP gap of $100 billion? The MPC = .90.