What are qualifications and limitations of multiplier model

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Reference no: EM13222121

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:
The amount consumers will spend on new consumption
The amount of new spending from producers
The multiplier in this case
The total increase in spending from the primary spending of $400 million
Explain the multiplier concept as it applies in this case.
What are the qualifications and limitations of the multiplier model?

Reference no: EM13222121

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