Reference no: EM131610678

Question: This problem shows how to estimate the cumulative effect of a tax cut on a country's economy. Suppose the government proposes a tax cut totaling $100 million. We assume that all the people who have extra money spend 80% of it and save 20%. Thus, of the extra income generated by the tax cut, $100(0.8) million = $80 million is spent and becomes extra income to someone else. These people also spend 80% of their additional income, or $80(0.8) million, and so on. Calculate the total additional spending created by such a tax cut.