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Unformatted text preview: There is also a multiplier for government spending. This multiplier is derived in a different way. When the government increases purchases, it directly increases output, or national income. But, there is a greater effect than just the actual amount of increase in government purchases. When the government spends more, the populace receives more. That is, because the population is the target of increased government spending, personal incomes, and thus consumption, increases. Once again, the size of this increase is based on the MPC. The total change in output as a result of a change in government purchases is equal to (change in government purchases) / (1 - MPC). This number is called the government spending multiplier. 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 -...
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- Fall '10