Parker has an open economy with government. The economy of Parker has the follow
ID: 1216841 • Letter: P
Question
Parker has an open economy with government. The economy of Parker has the following features: The marginal propensity to consume out of disposable income is 0.60. The net tax rate is 30%. The marginal propensity to import is 0.10. The value of marginal propensity to spend in Parker is equal to. (Round your response to two decimal places.) Using the value of marginal propensity to spend obtained above, the value of the simple multiplier in Parker is found to be equal to. (Round your response to two decimal places.) Now suppose that the government in Parker increases the net tax rate by an absolute value of 10%. The new value of marginal propensity to spend in Parker is equal to. (Round your response to two decimal places.) Using the obtained above new value of marginal propensity to spend after the government in Parker increases the net tax rate by 10%, the new value of the simple multiplier will be. (Round your response to two decimal places.) We can see that an increase in the net tax rate will the value of the marginal propensity to spend and the value of the simple multiplier.Explanation / Answer
Marginal propensity to consume and marginal propensity to spend are relateively same but in the given question Marginal propensity to spend also includes Marginal propensity to Imports(MPM).
1.Value of marginal propensity to spend in parker is equal to
MPC+MPM= 0.6+0.1 = 0.7
2.Value of simple multiplier in parker is equal to
1/MPS (Marginal propensity to save)
MPS=1-MPC
=> 1/(1-0.7) = 3.33
3. When tax rate increases by 10%, new Marginal propensity to spend will be equal to
MPC will be decreased by increase in tax
=>0.6-0.1=0.5
therefore, Marginal propensity to spend = 0.5+0.1=0.6
4. New value of simple multiplier will be equal to
1/0.6=2.5
5. we can see that an increase in the tax rate will DECREASE the value of margginal propensity to spend and DECREASE the value of Multiplier
This is because as the tax incrases the expenditure increase and the relative savings will be decreased. So Increase in tax results in decrease in MPC and Multiplier