Congress is considering a tax credit program for those who purchase wind or solar-powered products. Proponents of the 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 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. 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 ½, and American producers' MPC is also ½.
•Calculate the following, explaining how you arrived at each result:
?The amount consumers will spend on new consumption
?The amount of new spending from producers
?The multiplier in this case
?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?