Elucidate the multiplier concept as it applies in this case

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Reference no: EM1355184

Congress is considering a tax credit program for those who purchase energy-efficient appliances. Proponents of the program have said that $400 million will be given directly to taxpayers and argue that this will have an economic effect that is greater than the original $400 million spent because of the multiplier effect. Many voters and taxpayers are not familiar with the concept of a multiplier in this sense. Your think tank has decided to produce a short report that will help voters better understand the proponents' claims, and Gabe has asked you to write this report.

Be sure to include the following in your report:

• Give a basic explanation of how the multiplier concept is computed, including MPC.

• Assume that the average American's marginal propensity to consume (MPC) is 2/5, and American producers' MPC is also 2/5.

• Calculate the following, explaining how you arrived at each result:

o The amount consumers will spend on new consumption

o The amount of new spending from producers

o The multiplier in this case

o The total increase in spending from the primary spending of $400 million

• Elucidate the multiplier concept as it applies in this case.

• What are the qualifications and limitations of the multiplier model?

Reference no: EM1355184

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