![]() ![]() This example shows us how the multiplier is lessened by the existence of an automatic stabilizer and thus helping to lessen the fluctuations in real GDP as a result of changes in expenditure. This figure would give us the instance where, again, a $1 billion change in expenditure would now lead to only a $1.79 billion change in equilibrium real GDP. If these figures were now substituted into the multiplier formula, the resulting figure would be 1.79. Lets now take an economy where there are positive taxes (an increase from 0 to 0.2), while the MPC and MPI remain the same: This figure would give us the instance where a (for instance) $1 billion change in expenditure would lead to a $2.5 billion change in equilibrium real GDP. If these figures were substituted into the multiplier formula, the resulting figure would be 2.5. Here we have an economy with zero marginal taxes and zero transfer payments. Holding all other things constant, ceteris paribus, the greater the level of taxes, or the greater the MPI then the value of this multiplier will drop.
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