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EFFECTS
$1.00
$1.00
$10B + 9B = 19B
Instead of Government
changing its spending, they
could change TAXES instead.
KEYNESIAN MULTIPLIER
EFFECTS
Assume in the economy the MPC and the
MPS are still 90% and 10% respectively.
Assume the Government decides to REDUCE
taxes by $10 Billion. This means that $10B
is now in the hands of people and NOT in the
hands of the Government. According to
Keynes, what is the first thing that people in
the economy are going to do with that new
$10Billion?? They are going to Spend 90%
and Save 10%!!
KEYNESIAN MULTIPLIER
EFFECTS
Once again, it does not stop here. Each time the money is
spent it keeps reducing by the 90% and 10% ratio UNTIL it
gets to ZERO and GDP is some much larger number.
KEYNESIAN MULTIPLIER
EFFECTS
Keynes came up with a simple formula to do
the math for you. Remember in the
beginning it was PEOPLE in the Economy
that start this buying frenzy. This is very
IMPORTANT to remember.
Example:
We know the MPC is 90% and the MPS is 10%.
We can plug the appropriate number into the Tax Cut
Multiplier and come up with a useful number.
Tax Cut Multiplier
This means that ANY dollar the Govt spends in the economy is
going to multiply on itself 4 TIMES
This means that ANY dollar received in Tax Cuts in the economy is
going to multiply on itself 3 TIMES