Question

Now suppose that households in this economy allocate each additional dollar of income in the following way. Households continue to save $0.20 of each additional dollar income; however, they now pay $0.05 in taxes on each additional dollar of income, and they now spend $0.15 of each additional dollar on imported goods. The remaining fraction of each additional dollar goes toward consumption of domestically produced output. In this case, the fraction of an additional dollar of income that is not spent on domestic output is equal to . Taking the impact of taxes and imports into consideration, the multiplier for this economy is .

Answer 1

Multiplier= 1.666667

Step-by-step explanation:

This is an open economy:

So the households can either save the income, or adquire imported goods.

also their income is reduced by taxes, so we must discount the three factors to get the multiplier.

marginal propensity to withdraw (mpw)

saving + tax rate + import

0.2 s + 0.05 t + 0.15 import = .4

Multiplier

1 / (1-mpw) = 1/0.6 = 1.66667