Explain multiplier concept as it applies in this case

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Reference no: EM1369045

Q. Details: Congress is considering a tax credit program for those who purchase wind or solar-powered products. Proponents of program have said that $400 million will be given directly to taxpayers and are arguing that this will have an economic effect that is greater than original $400 million spent multiplier effect. Many voters and taxpayers are not familiar with concept of a multiplier in this sense. Your think tank has decided to produce a short report that will help voters better understand proponents' claims and Gabe has asked you to write this.
Be sure to include following in your report:

1. Give a basic explanation of how multiplier concept is computed, including MPC.

2. Assume that average American's marginal propensity to consume (MPC) is ½ and American producers' MPC is also ½.

3. Calculate following, explaining how you arrived at each result:

a. amount consumers will spend on new consumption

b. amount of new spending from producers

c. multiplier in this case

d. total increasing spending from primary spending of $400 million

4. Explain multiplier concept as it applies in this case.

5. What are qualifications and limitations of Multiplier Model?

Reference no: EM1369045

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