Question

Suppose John experienced an increase in income of $2,500 due to a tax reduction. Assume that people in the economy have a marginal propensity to consume of 80% and a marginal propensity to save of 20%. Use the table below to track the increase in total expenditures due to the tax reduction. Assume all individuals consume their income in accordance with the marginal propensity to consume. Instructions: Round your answers to two decimal places. Fiscal Policy and the Multiplier Change in Total Expenditures Change in Saving D Event John uses his income to purchase additional meals from Erin's restaurant. Erin uses her income to purchase additional books from Rita's book store. Rita uses her income to purchase coffee from William's coffee shop. William uses his income to purchase goods from the farmers' market. Total increase in expenditures due to these transactions

Answer 1

Events-

a) Change in expenditure = 2500*0.80 = 2000

change in saving = 2500*0.20 = 500

b) change in expenditure = 2000*0.80 = 1600

change in saving = 2000*0.20 = 400

c) change in expenditure = 1600*0.80 = 1280

change in saving = 1600*0.20 = 320

d) change in expenditure = 1280*0.80 = 1024

change in saving = 1280*0.20 = 256

e) total increase = 2000+1600+1280+1024 = 5904