Explain why the total benefits
Explain why the total benefits to the local economy are higherwhen we use the simple spendingmultiplier. Specifically, what are we assuming aboutthis city when we calculate benefits using the simple spendingmultiplier formula?
Answer:
Multiplier: Itmeasures the change in national income due to change in investmentlevel. When there in increase in investment, national income risesby multiple of it.
Multiplier is calculated as Change in Income / Change inInvestment.
Assume MPC = 0.8 and investment raised by 100 crores. It willdirectly raise the level of income by 100 crore as one personspending is another person income.
| MPC = 0.8 | ||
| Round | Change in Investment | Change in Income |
| 1 | 100 | 100 |
| 2 | – | 100 * 0.8 = 80 |
| 3 | – | 100 * 0.8^2 = 64 |
| 4 | – | 100 * 0.8^3 = 51.2 |
| – | and so on… |
Change in Income = 100 + 80 + 64 + 51.2 + ……..
Change in Y = Change in I + MPC * Change in I + MPC^2 * Changein I………………
Change in Y = Change in I (1 + MPC + MPC^2……)
Sum of geometric progression is:
Change in Y / Change in I = [1 / (1 – MPC)]
We can see from the above table that investment of 100 crorestends to raise total income by much more than 100 crores.
Assumptions of multiplier model are:
- MPC is constant
- No time lags in spending multiplier process
- People always change their consumption when incomechanges.
"Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"
