![]() 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. ![]() MPI = Marginal Propensity to Import (fraction of incremental income spent on imports).T = Marginal (induced) tax rate (fraction of incremental income that is paid in taxes).MPC = Marginal propensity to consume (fraction of incremental income spent on domestic consumption).This section incorporates automatic stabilization into a broadly Keynesian multiplier model. ![]() Incorporated into the expenditure multiplier Since output increases in booms and decreases in recessions, expenditure is expected to increase as a share of income in recessions and decrease as a share of income in booms. As a result, government expenditure increases automatically in recessions and decreases automatically in booms in absolute terms. Generally speaking, the number of unemployed people and those on low incomes who are entitled to other benefits increases in a recession and decreases in a boom. Most governments also pay unemployment and welfare benefits. poll taxes, export tariffs or property taxes). Some other forms of taxation do not exhibit these effects, if they bear no relation to income (e.g. During an economic boom, tax revenue is higher and in a recession tax revenue is lower, not only in absolute terms but as a proportion of national income. If national income rises, by contrast, then tax revenues will rise.
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