3. The spending multiplier effect Consider a hypothetical economy. Households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The spending multiplier for this economy is Suppose investment in this economy increases by $300 billion. The increase in investment will lead to an increase in income, generating an increase in consumption that increases income yet again, and so on. Fill in the following table to show the impact of the change in investment on the first two rounds of consumption spending and, eventually, on total spending and income. Change in Investment - $300 billion First Change in Consumption S billion Second Change in Consumption SI billion Total Change in Spending 5 billion Now consider the impacts of a change in taxes. The tax multiplier in this question will be thus, if taxes increase by $100 billion then spending will change by S billion