Two countries, A and B , both are currently in recession. The values of the MPS for A and B are 0.1 and 0.5 respectively. The governments of both countries are planning to boost income through an expansionary policy of a tax cut of $1 billion.

Question

Kiersten Cooke

Business

11 March, 23:03

Two countries, A and B , both are currently in recession. The values of the MPS for A and B are 0.1 and 0.5 respectively. The governments of both countries are planning to boost income through an expansionary policy of a tax cut of $1 billion.

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Ali Silva · Answer 1

The policy of tax cut will be less effective in country B than in country A since the value of the tax multiplier is lower in country B.

The multiplier effect refers to the increase in final income arising from any new injections.

Calculating the Multiplier Effect for a simple economy

k = 1/MPS

A = 1/0.1 = 10

B = 1/.5=2