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    Calculation of the Multiplier Effect

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    What would be the effect of a cut in taxes of $200 billion if the marginal propensity to consume were .9? Why would this policy be different from simply having the government initiate a $200 billion spending program (assuming the income multiplier is 10)? Support your answer with hypothetical calculations.

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    Solution Preview

    When the government begins a spending program, it increases government spending. This stimulates increased consumer spending. The total effect is given by the Spending Multiplier (SM).

    SM ...

    Solution Summary

    If the Marginal Propensity to Consume (MPC) is known, calculate the total effect of a cut in taxes and compare it with a similar change in government spending.