Congress is considering a tax credit program for those who purchase energy-efficient appliances. Proponents of the program have said that $400 million will be given directly to taxpayers and argue that this will have an economic effect that is greater than the original $400 million spent because of the multiplier effect. Many voters and taxpayers are not familiar with the concept of a multiplier in this sense. Your think tank has decided to produce a short report that will help voters better understand the proponents' claims, and Gabe has asked you to write this report.
Be sure to include the following in your report:
* Give a basic explanation of how the multiplier concept is computed, including MPC.
* Assume that the average American's marginal propensity to consume (MPC) is 2/5, and American producers' MPC is also 2/5.
* Calculate the following, explaining how you arrived at each result:
o The amount consumers will spend on new consumption
o The amount of new spending from producers
o The multiplier in this case
o The total increase in spending from the primary spending of $400 million
* Explain the multiplier concept as it applies in this case.
* What are the qualifications and limitations of the multiplier model?