2. 职称英语
  3. Explain: "Equal increases in government spending and tax revenues of n dollars w

Explain: "Equal increases in government spending and tax revenues of n dollars w

游客2025-06-21  22
问题 Explain: "Equal increases in government spending and tax revenues of n dollars will increase the equilibrium GDP by n dollars". Does this hold true regardless of the size of the MPS?
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答案 Yes, this is true. When government spending changes, the additional income generated enters the income stream immediately from the first expenditure round. Tax changes of equal value do not have an equivalent impact on expenditure in the first round. This is because taxes impact on disposable income first and then upon expenditure.
Suppose MPS is 0.1 and let n=＄100. The question suggests that government spending of＄100 financed by a tax increase of ＄100 will increase real GDP by ＄100. The positive income stream coming from the increase in government spending will generate income equal to the (100 + 90 + 81 + 72.90 + etc.)=100×1/MPS=＄100×1/0.1=＄10,000. The expenditure of one person becomes the income of the next. The reductions in income that result from the tax increase will be (90 + 81 + 72.9 + etc.)=100×MPC×1/MPS=＄900. If you take the tax stream away from the government expenditure stream you are left with ＄100. The tax stream is smaller because only ＄90 of the initial ＄100 levied in taxes would have been spent in the first round. If the MPS was 20%, for instance, then the "common" income amounts would start (80 + 64 + 51.20 + etc.) and ＄100 would still remain after the streams were substracted. Therefore, the final result is in no way dependent on the size of marginal propensity to save (MPS).
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