Question

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1. A tax rebate that returns a certain amount of money to taxpayers can result in spending that many times this amount. This phenomenon is known in economics as the multiplier effect. It occurs because the portion of the rebate that is spent by one individual becomes income for one or more others who, in turn, spend some of it again, creating income for yet other individuals to spend. If the fraction of income that is saved remains constant as this process continues indefinitely, the total amount spent as a result of the rebate is the sum of a geometric series. Suppose that nationwide approximately 90% of all income is spend and 10% is saved. How much total spending will be generated by a$40 billion tax rebate if saving habits do not change?

Answer 1

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