91Ó°ÊÓ

Tax multiplier addresses sway on Real Output because of progress in the Tax rate.

Government Multiplier addresses change in Real GDP because of progress in Government Expenditure

Given,

government expenditures rise by$∆G$=$\$1$billion

MPC = $0.8$

Now, government multiplier =

$\begin{array}{r}\frac{\mathrm{Δ}Y}{\mathrm{Δ}G}=\frac{1}{1−MPC}\\ \frac{\mathrm{Δ}Y}{1}=\frac{1}{1−0.8}\end{array}$

$\mathrm{â–³}Y=5$trillion

aggregate expenditure curve shift upward by$\$1$billion

Given,

MPC = $0.8$

MPS = $0.2$

Tax multiplier =

$\frac{\mathrm{△}Y}{\mathrm{△}T}=\frac{−MPC}{MPS}$

role="math" localid="1651986364126" $∆Y=\frac{−0.8}{0.2}=−4$billion

Given,

MPC =$0.8$

MPS = $0.2$

Overall impact = increased output due to government expenditure - reduced output due to government expenditure

$$\begin{gathered} ⇒5-4 \\ =1 \end{gathered}$$

There is an increase in output by$\$1$trillion

Given,

MPC = $\frac{3}{4}$

MPS = $1−\frac{3}{4}=\frac{1}{4}$

Now calculating,

$\frac{−MPC}{1−MPC}+\frac{1}{1−MPC}=1$

$⇒\mathrm{Δ}G+\mathrm{Δ}T=1$

Adding tax and government multiplier,

$\frac{−MPC}{1−MPC}+\frac{1}{1−MPC}$

$\frac{−MPC+1}{1−MPC}=\frac{1−MPC}{1−MPC}=1$

$⇒\mathrm{Δ}G+\mathrm{Δ}T=1$

increase in the output remains the same i.e$1$