Final answer:
The total increase in spending in the first year after a $1 trillion tax cut with an MPC of 0.90 and two spending cycles would be $18 trillion, calculated by applying the initial change in spending through the spending multiplier of 10 for two cycles.
Step-by-step explanation:
If taxes were cut by $1 trillion and the marginal propensity to consume (MPC) was 0.90, to calculate the total increase in spending in the first year with two spending cycles per year, we first calculate the initial increase in spending due to the tax cut. With an MPC of 0.90, the initial increase in spending would be 0.90 × $1 trillion = $900 billion.
Next, we use the multiplier effect to determine the total increase in spending. The spending multiplier can be calculated using the formula 1/(1 - MPC), which in this case is 1/(1 - 0.90) = 10. So, the total increase in spending after one full cycle would be 10 × $900 billion = $9 trillion.
However, since there are two spending cycles within the year, the effect of the original $900 billion increase in spending would go through the economy twice. This implies that the total increase in spending for the first year would be 2 × $9 trillion = $18 trillion, assuming no other changes in economic conditions and that all other factors remain constant.