- MPC = 0.75, MPS = 0.25, Multiplier = 4
- MPS = 0.2, Multiplier = 5, Total Change in Spending = +$2,500
- MPC = 0.9, Multiplier = 10, Total Change in Spending = -$2,000
- Change in Consumption = +$1,000, MPC = 0.5, MPS = 0.5
- Maximum change in GDP from government spending: $300 billion * (1 / (1 - 0.75)) = $300 billion * 4 = $1,200 billion
- Maximum change in GDP from tax cut: $300 billion * (0.75 / (1 - 0.75)) = $300 billion * 3 = $900 billion
- Maximum change in GDP from government transfers: $200 billion * (0.75 / (1 - 0.75)) = $200 billion * 3 = $600 billion
- Maximum change in GDP from entire stimulus package: $1,200 billion + $900 billion + $600 billion = $2,700 billion
- The effectiveness of the stimulus package would decrease because a higher MPS (0.5) means a lower MPC (0.5), resulting in a smaller multiplier (2 instead of 4), so each dollar of stimulus generates less additional spending and GDP.
- Maximum change in GDP from entire stimulus package with MPS = 0.5: Government spending effect = $300 billion * 2 = $600 billion; Tax cut effect = $300 billion * (0.5 / 0.5) = $300 billion; Transfer effect = $200 billion * (0.5 / 0.5) = $200 billion; Total = $600 billion + $300 billion + $200 billion = $1,100 billion
Parent Tip: Review the logic above to help your child master the concept of ap macroeconomics worksheet.
