This problem deals with the question of estimating the cumulative effect of a tax cut on a country's economy. Suppose the government proposes a tax cut totaling $100 million. We assume that all the people who have extra money to spend would spend 80% of it and save 20%. Thus, of the extra income generated by the tax cut, $100(0.8) million = $80 million would be spent and so become extra income to someone else. Assume that these people also spend 80% of their additional income, or $80(0.8) million, and so on. Calculate the total additional spending created by such a tax cut.
Show transcribed image textThis problem deals with the question of estimating the cumulative effect of a tax cut on a country's economy. Suppose the government proposes a tax cut totaling $100 million. We assume that all the people who have extra money to spend would spend 80% of it and save 20%. Thus, of the extra income generated by the tax cut, $100(0.8) million = $80 million would be spent and so become extra income to someone else. Assume that these people also spend 80% of their additional income, or $80(0.8) million, and so on. Calculate the total additional spending created by such a tax cut.