Sheridan CollegeECON 10001D

Assume that Canadian government taxes away $0.50 of each dollar of new income, that 40% of the remaining $0.50 of disposable income is spent on imports, and that 10% of disposable income is saved. Enter your responses below rounded to 2 decimal places.

a. The marginal propensity to withdraw is  .

b. From each new dollar of income $  is spent on domestic consumption items.

c. The value of the Canadian spending multiplier is  .

 

Answer

Step-by-step explanation

a. The marginal propensity to withdraw is

MPW = MPT + MPS + MPM

Given:

Canadian government taxes away $0.50 of each dollar of new income and 40% of remaining $0.50 of disposable income.

Marginal propensity to tax (MPT) = Canadian government taxes away = $0.50

Marginal propensity to import (MPM) = Proportion of disposable income spent on imports * disposable income

= 40% * 0.50

= 0.40 * 0.50

= 0.2

10% of the disposable income is saved

Marginal propensity to save (MPS) = Proportion of disposable income save * disposable income

= 10% * 0.50

= 0.10 * 0.50

= 0.05

MPW = MPT + MPM + MPS = 0.50 + 0.2 + 0.05 = 0.75

Therefore,

The marginal propensity to withdraw is 0.75.

b. From each new dollar of income $  is spent on domestic consumption items.

New dollar of income = 1-MPW = 1 - 0.75 = 0.25

From each new dollar of income $0.25 is spent on domestic consumption items.

c. The value of the Canadian spending multiplier is  .

Canadian spending multiplier = 1/MPW = 1/0.75 = 1.333

The value of the Canadian spending multiplier is 1.33