In 2016, economists forecast the U.S. MPS will be 0.15 and the MPM will be 0.10.

Question

In 2016, economists forecast the U.S. MPS will be 0.15 and the MPM will be 0.10. Estimate the maximum overall total effect on national income of the following two changes in fiscal policy:

a) A decrease in govt spending of $100 billion and a decrease in taxes of 50 billion.

b) If fiscal policy is unchanged (ignore part a above) but GPDI from business increases as below, what will be the maximum
impact on national income?

An increase in planned business investment spending of $60 billion without any change in fiscal policy.

c) What are some reasons why the maximum multiplier effect might not happen in the U S?

Explanation / Answer

Planned business investment increase will increase AD and. Output in the economy which raises employment and prices in the economy but only for a short period like a speculative action . The multiplier effect depends upon how much money the gobernment infuses in the economy if the actual investment is not at par with the planned investment then the multiplier effect does not work as expected.

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