Homework Assignment: Fiscal Policy (Chapter 11) The multiplier effect is an important component of fiscal policy. We first encountered the multiplier effect in Chapter 9, but then it was an increase in Investment of $100 billion that caused the economy to grow by $500 using the Simple Spending Multiplier (SSM). As discussed at the time, the SSM is much too simple, but it does show how important the Marginal Propensity to Consume (MPC) is. Other factors that influence the magnitude of the multiplier include how much spending occurs on imported goods, which can be measured by the Marginal Propensity to Import (MPM), and whether the economy is stimulated via direct government purchases or a tax cut to consumers. This homework assignment explores factors that influence the actual multiplier in our economy. Now assume the $500 billion as a fiscal stimulus designed to close out a large contractionary gap (i.e., an expansionary policy). The tables on the back, once completed - and that is your assignment - will quantify the impact of the MPC, MPM, and what form the stimulus takes (i.e., spending vs. taxes). Calculate the multipliers to one place to the right of the decimal point, the growth numbers do not require decimal points. Something to think about. Focusing on the tax cut approach, if the government decided to go that route with their fiscal policy, they may be able to influence the magnitude of the multiplier by focusing the tax cut on particular taxpayers. Identify a group that you think getting a larger portion of tax cuts would lead to a larger multiplier. Briefly explain your thinking.Table 1 Stimulus Marginal Stimulated Amount -- Propensity Growth in to Spending Multiplier Economy ($billions) Consume (GDP) (MPC) ($billions) 500 0.6 500 0.7 500 0.8 500 0.9 Table 2 Stimulus Marginal Marginal Stimulated Amount -- Propensity Propensity Growth in to Spending to Import Multiplier Economy ($billions) Consume (MPC) (MPM) (GDP) ($billions) 500 0.9 0. 1 500 0.9 0.2 500 0.9 0.3 500 0.9 0.4 Table 3 Stimulus Marginal Stimulated Amount -- Propensity Growth in Tax Cut to Multiplier Economy ($billions) Consume (GDP) (MPC) ($billions) -500 0.6 -500 0.7 -500 0.8 -500 0.9