Let us work through a couple of examples

Let us work through a couple of examples -...

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Let us work through a couple of examples. The first one will deal with tax policy. What is  the total change in output from a tax cut of $20 million if the MPC is 0.8? To solve this,  simply plug these numbers into the tax multiplier, that is [(change in taxes) * -MPC] / (1 -  MPC). This becomes [($-20 million) * -0.8] / (1 - 0.8) = $80 million. This means that a  $20 million tax cut will yield an $80 million increase in output. What is the process this  equation models? Simply put, when consumers have more disposable income, they  spend some and save some. The money that they spend goes back into the economy  and is saved and spent by somebody else. This process continues, and eventually the  final change in output created by a tax cut is significantly larger than the initial tax cut  itself.  The second example we will work through deals with government spending policy. What 
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Let us work through a couple of examples -...

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