Money and Banking Study Set 1
Quiz 21 :
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Q74 Q74 Q74
An increase in government spending G that is paid for by an identical increase in taxes increases equilibrium output by Gm regardless of the mpc. Prove. The decrease in expenditure due to the tax increase is mpc xG (some comes out of savings), so the total increase in expenditures is G - mpc xG = (1 - mpc)G. The total change in equilibrium output is m(1 - mpc)G where m is the multiplier, but m = 1/(1 - mpc) so the total change is G.