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The Role of the Government

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The Role of the Government
Nesbert L. Dantzler III
December 10, 2010

With the government giving four hundred million dollars to taxpayers, one must know how the multiplier effect works. In this sort report the multiplier concept will be explained which will include the marginal propensity to consume. Calculations and figures will be used to illustrate this and the amount consumers will spend along with new spending. It will also be shown how to get the multiplier itself. The qualifications and limitations will also be talked about concerning the multiplier model. The definition of marginal propensity to consume is defined as the amount that “consumption changes in a response to incremental changes in disposable income. It is equal to change in consumption divided by disposable income.” (Webfinance,2010) To figure the multiplier it is determined “by one divided by one minus the marginal propensity to consume or MPC.” ( Samuelson, 2010) In the following scenario four hundred million dollars will be given to taxpayers for solar powered products. The assumed value of MPC is 0.5 and the American producers MPC was 0.5. We were asked to calculate the money consumers will spend on consumption. The total that was derived was two hundred million. 400* .5 =200million. The multiplier was calculated by using this formula. M=1/1-mpc = 1/mps or 1/1-.5 = 1/ .5 = 2. The total increase in spending was 600 million which was the 400 + 200 the sum of the two. “Some limitations are that the price level will change due to the demand increases. Expenditures depend on more than the current income.” (McGraw-Hill, 2006) Some qualifications are that it is a very simple way to understand the aggregate demand process. As I struggle to understand these formulas it is slowly coming to light how it all works out in the great

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